Micro-Hedge

DEFINITION of 'Micro-Hedge'

An investment technique used to eliminate the risk of a single asset. In most cases, this means taking an offsetting position in that single asset.

If this asset is part of a larger portfolio, the hedge will eliminate the risk of the one asset but will have less of an effect on the risk associated with the portfolio.

BREAKING DOWN 'Micro-Hedge'

Say you are holding the stock of a company and want to eliminate the price risks associated with that stock. To offset your position in the company, you could take a short position in the futures market, thereby securing the stock price for the period of the futures contract. This strategy is used when an investor feels very uncertain about the future movement of a single asset.

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RELATED FAQS
  1. 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 Answer >>
  2. How are negative correlations used in risk management?

    Learn about risk management and how negative correlations between assets are used to diversify and hedge risk associated ... Read Answer >>
  3. What is an elimination period?

    Elimination period is a term used in insurance to refer to the time period between an injury and the receipt of benefit payments. ... Read Answer >>
  4. 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 Answer >>
  5. How does market risk differ from specific risk?

    Learn about market risk, specific risk, hedging and diversification, and how the market risk of assets differs from the specific ... Read Answer >>
  6. Why do companies enter into futures contracts?

    Learn how companies use futures contracts for the purposes of hedging their exposure to price fluctuations as well as for ... Read Answer >>
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