Short Hedge

AAA

DEFINITION of 'Short Hedge'

An investment strategy that is focused on mitigating a risk that has already been taken. The "short" portion of the term refers to the act of shorting a security, usually a derivatives contract, that hedges against potential losses in an investment that is held long.

If a short hedge is executed well, gains from the long position will be offset by losses in the derivatives position, and vice versa.

INVESTOPEDIA EXPLAINS 'Short Hedge'

A common risk in short hedging is basis risk, or the risk that price levels will not change much over the period the hedge is in place; in this scenario, the asset held in the long position would not gain any value, and the short hedge would lose value.

Short hedging is often seen in the agriculture business, as producers are often willing to pay a small premium to lock in a preferred rate of sale in the future. Also, short hedges involving interest rates are common among institutional money managers that hold large amounts of fixed income securities and are concerned about reinvestment risk in the future.

RELATED TERMS
  1. Downside Protection

    The use of an option or other hedging instrument in order to ...
  2. Cushion Theory

    The theory used when many investors have taken a short position ...
  3. Reinvestment Risk

    The risk that future coupons from a bond will not be reinvested ...
  4. Short (or Short Position)

    1. The sale of a borrowed security, commodity or currency with ...
  5. Long Hedge

    A situation where an investor has to take a long position in ...
  6. Basis Risk

    The risk that offsetting investments in a hedging strategy will ...
Related Articles
  1. Exploring Non-Dollar Currencies For ...
    Options & Futures

    Exploring Non-Dollar Currencies For ...

  2. Commodities: The Portfolio Hedge
    Active Trading

    Commodities: The Portfolio Hedge

  3. Fueling Futures In The Energy Market
    Options & Futures

    Fueling Futures In The Energy Market

  4. Get A Short-Term Advantage In The Money ...
    Personal Finance

    Get A Short-Term Advantage In The Money ...

Hot Definitions
  1. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
  2. Leading Indicator

    A measurable economic factor that changes before the economy starts to follow a particular pattern or trend. Leading indicators ...
  3. Wage-Price Spiral

    A macroeconomic theory to explain the cause-and-effect relationship between rising wages and rising prices, or inflation. ...
  4. Accelerated Depreciation

    Any method of depreciation used for accounting or income tax purposes that allows greater deductions in the earlier years ...
  5. Call Risk

    The risk, faced by a holder of a callable bond, that a bond issuer will take advantage of the callable bond feature and redeem ...
  6. Parity Price

    When the price of an asset is directly linked to another price. Examples of parity price are: 1. Convertibles - the price ...
Trading Center