Cover

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DEFINITION of 'Cover'

The act of completing an offsetting transaction so as to eliminate a liability or obligation. It is generally used in the context of risk exposure, as when an investor decides to cover a short position in a stock to eliminate the risk of a "short squeeze." Covers normally reduce both risk and return of a particular position.


The term "cover" is distinct from "coverage," which, in the world of finance, indicates financial ratios that measure a company's margin of safety in servicing its debt and making dividend payments.




BREAKING DOWN 'Cover'

As a generic term, "cover" has a number of different connotations, but it's mainly used to indicate an act of lowering risk exposure. For instance, in the currency markets, the term forward cover is used to denote forward currency transactions that are undertaken for hedging purposes, to reduce currency risk.




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RELATED FAQS
  1. How does a forward contract differ from a call option?

    Forward contracts and call options are different financial instruments that allow two parties to purchase or sell assets ... Read Full Answer >>
  2. Why do companies enter into futures contracts?

    Different types of companies may enter into futures contracts for different purposes. The most common reason is to hedge ... Read Full Answer >>
  3. How can I hedge my portfolio to protect from a decline in the food and beverage sector?

    The food and beverage sector exhibits greater volatility than the broader market and tends to suffer larger-than-average ... Read Full Answer >>
  4. What techniques are most useful for hedging exposure to the insurance sector?

    Investing style determines the best hedging techniques for the insurance sector. This sector comprises three segments, two ... Read Full Answer >>
  5. How can I hedge my portfolio to protect from a decline in the retail sector?

    The retail sector provides growth investors with a great opportunity for better-than-average gains during periods of market ... Read Full Answer >>
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    Utilities is one of the most stable sectors in the market. As such, its primary appeal to investors is its resistance to ... Read Full Answer >>

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