Hedge

A hedge is an action taken to offset the potential for an adverse price change in an asset. By engaging in a hedge, one can generate an offsetting price movement that negates the prospective adverse price change. A perfect hedge is one that exactly offsets all of the potential loss associated with a position. Hedges are commonly used to provide protection when positions are being held in the following areas:

  • Commodities
  • Foreign currency
  • Securities

There is a cost associated with a hedge, so using one will reduce the profits that might otherwise be gained, assuming there is no adverse price change in the underlying asset.

Related Courses

Accounting for Derivatives and Hedges 
Corporate Finance 
Enterprise Risk Management