The Risk Limited Glossary
Hammersmith and Fulham decision - a 1992 legal decision that invalidated existing derivatives contracts with numerous U.K. local councils.|
Heat Rate - the amount of fuel energy required by a power generation unit to produce one kilowatt-hour of electrical output.
Heating Degree Day - a typical index variable in weather derivative transactions. Also referred to as HDD.
Heavy-tailed Distribution (fat-tailed) - a distribution in which the extreme portion of the distribution (the part farthest away from the median) spreads out further relative to the width of the center (middle 50%) of the distribution than is the case for the normal distribution. For a symmetric heavy-tailed distribution, the probability of observing a value far from the median in either direction is greater than it would be for the normal distribution. Heavy-tailed describes a distribution with excess kurtosis.
Hedge - a transaction or position taken in order to eliminate or mitigate the risk of adverse price movements in an exposure position such as an existing asset or liability position. See also delta hedging.
Hedge Accounting - accounting methodology established by provisions of FAS 133 for reporting of gains and losses on transactions intended to hedge exposed positions. Various criteria must be met as specified in FAS 133 in order to use hedge accounting for U.S. financial reporting. See also FAS 133.
Hedge Effectiveness - in U.S. accounting terminology, a criteria that must be met in order to use Hedge Accounting for U.S. financial reporting. This provision has proven problematic in the energy industry where partial hedges for such exposure components as basis risk are widely used. Under the rules of FAS 133 when testing for hedge effectiveness, only interest rate exposures can be broken down into their component parts. See also FAS 133.
Henry Hub - a natural gas pipeline hub in Louisiana that serves as the delivery point for New York Mercantile Exchange natural gas futures contracts and often serves as a benchmark for wholesale natural gas prices across the U.S.
Herstatt Risk - settlement risk; named after the German bank, Herstatt, whose 1974 failure highlighted the dangers of settlement risk.
Heteroskedasticity - a condition where a stochastic process has non-constant second moments [variance].
High Grade - a phrase used to describe investments with the highest quality ratings — usually AAA or AA.
Historical Volatility - the annualized Standard Deviation of percent changes in prices over a specific period. It is an indication of past volatility in market prices. See also Implied Volatility.
Holding Period - a time period over which the variability in the value of a portfolio of assets or potential earnings from some economic activity is assessed. See also VaR.
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