Hedging
Principles of Finance glossary · Principles Of Finance
Definition
Reducing exposure to a risk by taking an offsetting position.
Hedging in plain English
Hedging is buying yourself insurance against a bad outcome by making a second bet that pays off exactly when your first one hurts. If you own something whose price could fall, you take an offsetting position that gains when that price drops, so the two roughly cancel out. It's like a farmer who fears wheat prices will crash before harvest locking in a sale price today — if prices fall, the loss on the crop is balanced by the gain on the deal. You give up some potential upside in exchange for shrinking your risk, which is often a smart trade when you can't afford a big loss.
Related Principles of Finance terms
Principles of Finance practice questions · Principles of Finance flashcards · Principles of Finance study guide