Texas hedge

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A Texas hedge is a financial hedge that increases exposure to risk. An example would be hedging the purchase of a call option by buying shares of the same underlying or hedging UK Non-conforming RMBS Residuals with Mezzanine tranches.

Origin[edit]

The origin of the expression is slightly unclear. However, there are two competing theories among traders. One school of thought says that it refers to the saying 'Everything is bigger in Texas' because Texas hedging increases risk. The most reasonable explanation is that the Texas hedge refers to Texan cattle ranchers who might buy cattle futures contracts while already owning cattle, thereby doubling their risk exposure.[1]

External links[edit]

References[edit]

  1. ^ See CME Group's "Self-study Guide to Hedging with Livestock Futures and options," p. 28 [1]