Enron and Lay - 8th July 2004

This article introduces you to the basics of hedging fixed income derivatives trades.  It is meant to be a practical guide to understanding basic hedging.  Three common trade examples are presented with examples of different potential hedges.  Volatility smiles are touched on, as are the Greeks (delta, gamma, theta, vega, rho) and other risk measures (PV01/DV01, duration, convexity).   The language is written in layman’s terms as much as possible to facilitate understanding of hedging concepts without getting too deeply into complex mathematics.