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. Hedge Ratio

    1. A ratio comparing the value of a position protected via a ...
  4. Futures Market

    An auction market in which participants buy and sell commodity/future ...
  5. Hedge

    Making an investment to reduce the risk of adverse price movements ...
  6. Basis Risk

    The risk that offsetting investments in a hedging strategy will ...
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 ...
Related Articles
  1. Options & Futures

    Exploring Non-Dollar Currencies For Forex Trading

    Learn how investments in foreign currencies can diversify your portfolio.
  2. Active Trading

    Commodities: The Portfolio Hedge

    These diverse asset classes can provide downside protection and upside potential. Find out how to use them.
  3. Options & Futures

    Fueling Futures In The Energy Market

    The energy market influences every aspect of our lives, and these four options are its driving force.
  4. Personal Finance

    Get A Short-Term Advantage In The Money Market

    This investment vehicle is often the perfect stop-gap measure for growing your money.
  5. Options & Futures

    A Beginner's Guide To Hedging

    Learn how investors use strategies to reduce the impact of negative events on investments.
  6. Options & Futures

    For Maximum Market Returns, Get Creative With Hedges

    Proper hedges help to contain your losses while still allowing profits to grow.
  7. Options & Futures

    Give Yourself More Options With Real Estate Options

    Real estate options have many benefits, including a smaller initial capital requirement.
  8. Investing

    Hedged ETFs That Help You Cushion Currency Impact

    If you’re an investor holding non-U.S. assets, the returns on your investments will be affected when you translate your investment from its local currency
  9. Options & Futures

    How to Use Commodity Futures to Hedge

    Both producers and consumers of commodities can use futures to hedge. We explain, using a few examples, how to achieve commodity hedging with futures.
  10. Mutual Funds & ETFs

    Will the Natural Gas ETF KOLD Stay Hot?

    Proshares UltraShort Bloomberg Natural Gas ETF isn't an investment for the faint of heart.

You May Also Like

Hot Definitions
  1. Gordon Growth Model

    A model for determining the intrinsic value of a stock, based on a future series of dividends that grow at a constant rate. ...
  2. Cost Accounting

    A type of accounting process that aims to capture a company's costs of production by assessing the input costs of each step ...
  3. Law Of Supply

    A microeconomic law stating that, all other factors being equal, as the price of a good or service increases, the quantity ...
  4. Investment Grade

    A rating that indicates that a municipal or corporate bond has a relatively low risk of default. Bond rating firms, such ...
  5. Fringe Benefits

    A collection of various benefits provided by an employer, which are exempt from taxation as long as certain conditions are ...
  6. Irrevocable Trust

    A trust that can't be modified or terminated without the permission of the beneficiary. The grantor, having transferred assets ...
Trading Center