Hedging

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A hedge is an investment made to reduce the risk of adverse price movements in an asset or an existing investment position. It usually involves taking an offsetting position in a related security, such as a futures contract. For example, someone who owned a stock might sell a futures contract promising to sell that stock at a set price. [1]

One can use a wide variety of products and strategies for hedging, including options (e.g. purchasing a put option in order to offset at least partially the potential losses from owning a stock). Hedges reduce potential losses but also tend to reduce potential profits. [2]

Also see: Hedge fund

Some widely used types of hedging are:

Using hedging to manage exposure to commodities. For example, airlines buying or selling oil futures to protect them from rising fuel prices. The futures contract cushions the blow of the higher oil prices, acting as insurance. [3]

References

  1. Hedge definition. Investopedia.com.
  2. Hedge financial definition. financial-dictionary.
  3. Hedging Against $200 Oil. BusinessWeek.