Hedging is the application of financial analysis the use of diverse financial instruments to control and often reduce different types of risk.

It sounds like a simple concept, but with today's complex bank portfolios, sophisticated computer simulations of nearly every possible market scenario must be run to come up with an effective hedge strategy. Even the smallest bank that handles retail deposits, home loans, and little more must employ risk management techniques to guard against the possibility of customers withdrawing their money and the effects of changing interest rates, to name only two risks.

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