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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.
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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.
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Hedge funds seek positive absolute returns, and engage in aggressive strategies to make this happen.
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Hedge funds can draw returns well above the market average even in a weak economy. Learn about the risks.
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This trading strategy can reduce your risk - but only if you use it effectively.
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Derivatives can reduce the risks associated with changes in foreign exchange rates, interest rates and commodity prices.
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Flying high one day but not the next - see the stories behind some spectacular meltdowns.
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They've contributed to some major market scandals, but these instruments aren't all bad.
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