Hedge

AAA

DEFINITION of 'Hedge'

Making an investment to reduce the risk of adverse price movements in an asset. Normally, a hedge consists of taking an offsetting position in a related security, such as a futures contract.

VIDEO

Loading the player...

BREAKING DOWN 'Hedge'

An example of a hedge would be if you owned a stock, then sold a futures contract stating that you will sell your stock at a set price, therefore avoiding market fluctuations.

Investors use this strategy when they are unsure of what the market will do. A perfect hedge reduces your risk to nothing (except for the cost of the hedge).

RELATED TERMS
  1. Hedge Fund

    An aggressively managed portfolio of investments that uses leveraged, ...
  2. Downside Protection

    The use of an option or other hedging instrument in order to ...
  3. Double Hedging

    Hedging a position by using futures and options, thereby doubling ...
  4. Catastrophe Futures

    Catastrophe futures are futures contracts traded on the Chicago ...
  5. De-hedge

    The process of closing out positions that were originally put ...
  6. Hedged Tender

    A strategy in a tender offer where an investor short sells a ...
Related Articles
  1. Mutual Funds & ETFs

    Top 3 Switzerland ETFs

    Explore detailed analysis and information of the top three Swiss exchange-traded funds that offer exposure to the Swiss equities market.
  2. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  3. Economics

    4 Ways Airlines Hedge Against Oil

    Understand what a fuel hedge is and why an airline company would want to implement a hedging strategy. Learn about the different fuel hedging strategies.
  4. Stock Analysis

    Southwest Airlines: Delta's Worst Enemy?

    Learn about the rivalry between Southwest Airlines and Delta. For decades, Delta was the major operator in the South, but it has been displaced by Southwest.
  5. Mutual Funds & ETFs

    The Top 3 ETFs For Investing in Commodities

    Explore diversifying an investment portfolio through investing in commodities ETFs, and get information on some of the best commodity funds.
  6. Mutual Funds & ETFs

    ETF Analysis: Powershares DB US Dollar Bullish Fund

    Explore information and detailed analysis of two popular currency exchange-traded funds, the PowerShares DB U.S. Dollar Bullish and Bearish Index Funds.
  7. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI Singapore

    Learn more about BlackRock Advisor's iShares Singapore MSCI exchange-traded fund, which looks to mirror the holdings and yield from Singapore markets.
  8. Stock Analysis

    Southwest & Cheap Oil: The Perfect Combination?

    Discover how falling oil prices (and well-timed futures contracts) benefit Southwest Airlines.
  9. Options & Futures

    The Basics Of Option Price

    Options can be an excellent addition to a portfolio. Find out how to get started.
  10. Mutual Funds & ETFs

    Hedging With ETFs: A Cost-Effective Alternative

    The benefits of ETFs for hedging are clear and investors of all sizes are taking notice.
RELATED FAQS
  1. Are spousal Social Security benefits retroactive?

    Spousal Social Security benefits are retroactive. These benefits are quite complicated, and anyone in this type of situation ... Read Full Answer >>
  2. 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 >>
  3. 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 >>
  4. How does being overweight in a particular sector increase risk to a portfolio?

    An investor who is overweight in a particular sector risks a loss in value for the portfolio if there is a downturn in that ... Read Full Answer >>
  5. What types of companies benefit from reporting results utilizing constant currencies ...

    Any company that does a substantial amount of business in foreign countries, and is therefore subject to foreign currency ... Read Full Answer >>
  6. How do traders use out-of-the-money options to hedge?

    Traders can utilize out-of-the-money options to hedge an existing market position by either buying or selling options. A ... Read Full Answer >>
  7. How does implied volatility impact the pricing of options?

    Implied volatility is an important aspect of the time value premium of an option. As implied volatility increases, call and ... Read Full Answer >>
  8. What is a forward contract against an export?

    A forward contract against an export is an agreement between the importer and exporter to exchange a specified amount of ... Read Full Answer >>
  9. How can derivatives be used for risk management?

    Derivatives could be used in risk management by hedging a position to protect against the risk of an adverse move in an asset. ... Read Full Answer >>
  10. To what extent will changing fuel costs affect the profitability of the airline industry?

    Fuel costs represent one of the biggest expenses for the aerospace and airline industries. On average, fuel costs account ... Read Full Answer >>
  11. What is the difference between speculation and hedging?

    Speculators and hedgers are different terms that describe traders and investors. Speculation involves trying to make a profit ... Read Full Answer >>
  12. How can I use equity options to protect my stock portfolio from downturns?

    Equity options, or stock options, could serve as protection and help to mitigate risk for a long stock portfolio. Stock options ... Read Full Answer >>
  13. What techniques can be used to hedge exposure to the chemicals sector?

    An investor can hedge exposure to the chemicals sector in two ways. Because the sector is cyclical, an investor can allocate ... Read Full Answer >>
  14. How does market risk differ from specific risk?

    Market risk and specific risk are two different forms of risk that affect assets. All investment assets can be separated ... Read Full Answer >>
  15. How do I close a long position in forex?

    Closing a long position in forex trading depends on whether you are using a broker operating under U.S. trading regulations. In ... Read Full Answer >>
  16. What caused Black Monday, the stock market crash of 1987?

    The cause of the stock market crash of 1987 was primarily program trading, used by institutions to protect themselves from ... Read Full Answer >>
  17. What percentage of a diversified portfolio should be exposed to the banking sector?

    The turmoil of the late 2000s notwithstanding, the banking sector has historically been one of the most stable and least ... Read Full Answer >>
  18. How are negative correlations used in risk management?

    Negative correlation is a statistical measure used to describe a relationship between two variables. When two variables are ... Read Full Answer >>
  19. How can an investor hedge exposure to the aerospace sector?

    Investors can hedge exposure to the aerospace sector by investing in sectors that move inversely with the broader market. ... Read Full Answer >>
  20. What is the difference between risk avoidance and risk reduction?

    Risk avoidance and risk reduction are two ways to manage risk. Risk avoidance deals with eliminating any exposure of risk ... Read Full Answer >>
  21. How much does China's growth affect the price of industrial metals?

    Chinese buyers demand more industrial metals than the rest of the world combined. When China experiences strong growth and ... Read Full Answer >>
  22. How attractive is the internet sector for a growth investor?

    The Internet sector is an attractive sector offering many benefits to a growth investor. Growth investing is an investing ... Read Full Answer >>
  23. What trading strategies help investors withstand a drawdown?

    Two primary trading strategies to help a trader withstand a drawdown are hedging and following simple money management rules. Drawdown, ... Read Full Answer >>
  24. How should investors interpret unlevered beta?

    Unlevered beta is the beta of a company that focuses only on its assets. It removes the amount of debt a company has in order ... Read Full Answer >>
  25. What are some ways to reduce downside risk when holding a long position?

    A trader seeking to minimize his downside risk in an existing long position can do a number of things to protect a portion ... Read Full Answer >>
  26. How do I determine what the right situation is to make a covered call?

    A covered call is an option strategy where you have a long position in an asset and sell call options contracts on the same ... Read Full Answer >>
  27. How can I protect my investment portfolio from recessions?

    One of the biggest fears among investors is what happens to their portfolios during a recession. After all, economic contraction ... Read Full Answer >>
  28. How did the LIBOR scandal affect interest rate swaps?

    The LIBOR scandal impacted interest rate swaps in two important ways. During the period between 2005 and 2009, more than ... Read Full Answer >>
  29. How does Beta reflect systematic risk?

    Systematic risk, or market risk, is the volatility that affects many industries, stocks and assets. Systematic risk affects ... Read Full Answer >>
  30. What is the difference between diversification and hedging?

    Diversification looks to smooth out specific risk in one investment, while hedging helps to decrease one's losses by taking ... Read Full Answer >>
  31. What is a common strategy traders implement when using the Upside/Downside Ratio?

    Traders can utilize the upside/downside ratio to identify profitable points for adding to their stock portfolio holdings. ... Read Full Answer >>
  32. How can value investors benefit from investing in the metals and mining sector?

    Precious metals have an inverse relationship with stocks and currencies. They are usually unaffected by inflation, stocks ... Read Full Answer >>
  33. If I use hedging as a risk strategy, do I have to keep my eye on my portfolio all ...

    Hedging can be a vital part of overall portfolio management, but using it as a trading strategy requires spending significantly ... Read Full Answer >>
  34. How do hedge funds use short selling?

    Hedge funds use short selling to profit from stocks whose prices they believe are going to decline in value. A hedge is a ... Read Full Answer >>
  35. When short selling, how long should you hold on to a short?

    An investor should hold a short sell position for as long as the investment is profitable and as long as the investor can ... Read Full Answer >>
  36. What is the difference between hedging and speculation?

    Hedging involves taking an offsetting position in a derivative in order to balance any gains and losses to the underlying ... Read Full Answer >>
  37. How are futures used to hedge a position?

    Futures contracts are one of the most common derivatives used to hedge risk. A futures contract is as an arrangement between ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Depreciation

    1. A method of allocating the cost of a tangible asset over its useful life. Businesses depreciate long-term assets for both ...
  2. Recession

    A significant decline in activity across the economy, lasting longer than a few months. It is visible in industrial production, ...
  3. Bubble Theory

    A school of thought that believes that the prices of assets can temporarily rise far above their true values and that these ...
  4. Stock Market Crash

    A rapid and often unanticipated drop in stock prices. A stock market crash can be the result of major catastrophic events, ...
  5. Financial Crisis

    A situation in which the value of financial institutions or assets drops rapidly. A financial crisis is often associated ...
  6. Election Period

    The period of time during which an investor who owns an extendable or retractable bond must indicate to the issuer whether ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!