Cost of hedging
The price of removing a risk: an option premium, the rate differential inside a currency forward, the cost of rolling a futures position and the upside given up on the hedged part.
How to read the number
A hedge does not remove risk; it exchanges it for a cost known in advance. That cost has to be compared with the loss it protects against, not with zero.
When the metric lies
A permanent hedge over a long horizon can cost more than the event it was bought for: the payment is made every period, while the event may never arrive.
Also known as: hedging cost