What does strategic hedging involve?

Strategic hedging involves the active management of the hedging ratio, which refers to adjusting the proportion of hedged exposure in response to changing market conditions, risk assessments, and portfolio objectives. This approach recognizes that static hedging might not be sufficient as market dynamics and the underlying risks evolve. By actively managing the hedging ratio, investors can adjust their positions to reflect the changing correlations between their investments and the hedges they have put in place, potentially optimizing their risk-return profile.

In contrast, passive management of hedge positions does not adapt to changing market environments, thereby increasing risk exposure. Utilizing options, while it can be part of a hedging strategy, generally increases exposure rather than minimizing it, which diverges from the core objectives of hedging. Lastly, investing solely in fixed-income securities does not define a hedging strategy; rather, it reflects an investment approach that may or may not involve hedging practices at all.