hedging

Method of transferring Risk to permit the Risk Bearer to assume two offsetting positions at the same time so that, regardless of the outcome of an event, the risk bearer is left in a no win/no lose position. For example, in the options market, a stock owner of an underlying stock can write calls or buy puts. In the same options market, the short sellers of the underlying stock can buy calls or write puts.

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A concept that involves offsetting a risk position. In the commodities trade, it might involve a processor position or a speculative position. For example, a potato chip manufacturer can hedge or protect a profit margin on a large order of chips to be delivered in the future by buying potatoes in the futures market; a potato farmer may sell the futures contract to the process to protect some or all of his or her investment in raising his or her crop. A speculator in potato contracts might hedge a long position in old crop futures by selling new crop futures in anticipation of a bumper crop and, therefore, lower prices. Arbitrage is a type of hedge involving the buying of securities in one market and selling in another market when the price difference between markets offers a profitable trade. Hedged trades are used in the stock option market where the various positions are referred to as spreads, straddles, etc. In securities trading and investment, selling short is used to hedge stock ownership positions against a decline in the general market. See hedge fund.

The practice by which a business or investor limits risk by taking positions that tend to offset each other. For example, a business stands to lose money if the price of a commodity it holds declines, but it can offset this risk by agreeing to sell a specified amount of the commodity at a set price at some point in the future.