Derivative Transactions for Hedging Purposes Sample Clauses

Derivative Transactions for Hedging Purposes. Derivative transactions are widely used as a tool to reduce and hedge against risks faced by companies in the marketplace. In that regard, the use of hedging transactions is an important and essential part of the Companies’ overall risk management program. For purposes of this Plan, the definition of “hedging transaction” is a derivative transaction which is entered into and maintained to reduce: (a) The risk of a change in the value, yield, price, cash flow, or quantity of assets or liabilities that the insurer has acquired or incurred or anticipates acquiring or incurring; or (b) The currency exchange rate risk or the degree of exposure as to assets or liabilities that the insurer has acquired or incurred or anticipates acquiring or incurring. The Companies’ use of derivative transactions for hedging purposes may also include replication transactions. For purposes of this Plan, the definition of “replication transaction” is “a derivative transaction or combination of derivative transactions effected either separately or in conjunction with cash market investments included in the insurer’s investment portfolio in order to replicate the investment characteristic of another authorized transaction, investment or instrument and/or operate as a substitute for cash market transactions.” In certain circumstances, replication transactions can provide a more cost-effective means of investing in a given asset or group of assets, in effect, by synthetically replicating the characteristics and performance of the assets. Replication transactions can also be used to replicate certain desired, rather than all, characteristics of an asset. The Investment Manager shall structure the Companies’ replication transactions so that the potential exposure with respect to a replication transaction is directly related to the risks associated with the asset characteristics being replicated. Given the nature and purpose of a hedging transaction, the potential exposure associated with such transactions is generally limited. If a hedging transaction is structured properly as an effective hedge, any losses realized with respect to the asset or activity that was the subject of the hedge should be matched or offset, entirely or in part, by gains in the transaction. In that regard, a crucial element of the Companies maintaining a successful hedging program using derivative transactions is the Companies’ implementation of appropriate procedures and guidelines to evaluate the effectiveness ...