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What is hedging?

April 26, 2017hedging

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What is hedging?

3 Answers

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Hedging is, in effect, insurance against the price risk of a particular resource. The “resource” component can vary from physical commodities to interest rates and foreign exchange rates. Hedging helps limit the exposure to adverse price fluctuations not only in a resource you currently own, but also a resource you will own.

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Offsetting the price risk fixed in any cash market position, by taking an equal but opposite position in the futures market.

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Hedging is a mechanism to reduce price risk inherent in open positions. Derivatives are widely used for hedging. A Hedge can help lock in existing profits. Its purpose is to reduce the volatility of a portfolio, by reducing the risk.