hedge
An investment made to reduce the risk of adverse price movements in an asset, typically through an offsetting position in a related security.
Example
“The airline bought oil futures as a hedge against rising jet fuel costs.”
Memory Tip
A hedge is a FENCE around your investment — protecting it from downside.
Why It Matters
Hedging helps protect your wealth from unexpected market moves that could significantly reduce your savings or investment portfolio value. Understanding how to hedge allows you to make more informed decisions about protecting assets that matter to you, whether that is a home, retirement account, or business interests.
Common Misconception
Many people believe hedging is the same as insurance or that it guarantees profits and eliminates all risk. In reality, hedging reduces risk but comes with costs and trade-offs, and it can actually limit your gains if prices move in your favor.
In Practice
A farmer growing wheat might sell futures contracts for their expected harvest at a locked-in price of $6 per bushel, even though current prices are $5. If prices drop to $4 by harvest time, the futures contract protects them, but if prices rise to $8, they only receive $6 because they hedged their position.
Etymology
From Old English 'hecg' (a fence, boundary). To 'hedge' a bet meant limiting exposure by betting on both sides.
Common Misspellings
Protect your assets with the right insurance
Related Terms
More in risk management
Other risk management terms you should know
See Also
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