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
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