Hedging Transaction

AAA

DEFINITION of 'Hedging Transaction'

A type of transaction that limits investment risk with the use of derivatives, such as options and futures contracts. Hedging transactions purchase opposite positions in the market in order to ensure a certain amount of gain or loss on a trade. They are employed by portfolio managers to reduce portfolio risk and volatility or lock in profits.

INVESTOPEDIA EXPLAINS 'Hedging Transaction'

Hedging transactions are subject to ordinary gain and loss tax treatment. However, hedging losses of limited partners are usually limited to their taxable income for the year. Hedge funds use this sort of transaction extensively.

RELATED TERMS
  1. Double Hedging

    Hedging a position by using futures and options, thereby doubling ...
  2. Super Hedging

    A strategy that hedges positions with a self-financing trading ...
  3. Hedge Ratio

    1. A ratio comparing the value of a position protected via a ...
  4. Pairs Trade

    The strategy of matching a long position with a short position ...
  5. Derivative

    A security whose price is dependent upon or derived from one ...
  6. Hedge

    Making an investment to reduce the risk of adverse price movements ...
Related Articles
  1. Options & Futures

    Are Derivatives A Disaster Waiting To Happen?

    They've contributed to some major market scandals, but these instruments aren't all bad.
  2. Mutual Funds & ETFs

    Taking A Look Behind Hedge Funds

    Hedge funds can draw returns well above the market average even in a weak economy. Learn about the risks.
  3. Options & Futures

    Massive Hedge Fund Failures

    Flying high one day but not the next - see the stories behind some spectacular meltdowns.
  4. Active Trading

    How Companies Use Derivatives To Hedge Risk

    Derivatives can reduce the risks associated with changes in foreign exchange rates, interest rates and commodity prices.
  5. Markets

    Hedging With Puts And Calls

    This trading strategy can reduce your risk - but only if you use it effectively.
  6. Options & Futures

    Hedge Funds Hunt For Upside, Regardless Of The Market

    Hedge funds seek positive absolute returns, and engage in aggressive strategies to make this happen.
  7. Options & Futures

    Options -- Accessing Stakes In Apple At Less Cost

    Finding Apple stock costly to trade? Here are multiple ways to trade it through low-cost Apple options.
  8. Professionals

    Why Investors Need to Rebalance Their Portfolios

    The best way to explain why one should rebalance their portfolio is to show what could go wrong if one doesn't.
  9. Trading Strategies

    5 Ways To Adapt To Tough Markets

    Tough markets undermine profitability and lower self-confidence. Fight back with five simple but powerful rules of engagement.
  10. Investing Basics

    The Strange New World Of The Bitcoin Exchange Futures Market

    We explain the basics of the Bitcoin exchange and futures market.

You May Also Like

Hot Definitions
  1. Commercial Paper

    An unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories ...
  2. Federal Funds Rate

    The interest rate at which a depository institution lends funds maintained at the Federal Reserve to another depository institution ...
  3. Fixed Asset

    A long-term tangible piece of property that a firm owns and uses in the production of its income and is not expected to be ...
  4. Break-Even Analysis

    An analysis to determine the point at which revenue received equals the costs associated with receiving the revenue. Break-even ...
  5. Key Performance Indicators - KPI

    A set of quantifiable measures that a company or industry uses to gauge or compare performance in terms of meeting their ...
  6. Bank Guarantee

    A guarantee from a lending institution ensuring that the liabilities of a debtor will be met. In other words, if the debtor ...
Trading Center