Share on Facebook Share on Twitter Email
Answers.com

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.

Search unanswered questions...
Enter a word or phrase...
All Community Q&A Reference topics
 

Method of reducing the risk of loss caused by price fluctuation. It consists of the purchase or sale of equal quantities of the same or very similar commodities in two different markets at approximately the same time, with the expectation that a future change in price in one market will be offset by an opposite change in the other market. For example, a grain-elevator operator may agree to buy a ton of wheat and at the same time sell a futures contract for the same quantity of wheat; when the wheat is sold, he buys back the futures contract. If the grain price has dropped, he can buy back the futures contract for less than he sold it for; his profit from doing so will be offset by his loss on the grain. Hedging is also common in the securities and foreign-exchange markets. See also stock option.

For more information on hedging, visit Britannica.com.

 
hedging, in commerce, method by which traders use two counterbalancing investment strategies so as to minimize any losses caused by price fluctuations. It is generally used by traders on the commodities market. Typically, hedging involves a trader contracting to buy or sell one particular good at the time of the contract and also to buy or sell the same (or similar) commodity at a later date. In a simple example, a miller may buy wheat that is to be converted into flour. At the same time, the miller will contract to sell an equal amount of wheat, which the miller does not presently own, to another trader. The miller agrees to deliver the second lot of wheat at the time the flour is ready for market and at the price current at the time of the agreement. If the price of wheat declines during the period between the miller's purchase of the grain and the flour's entrance onto the market, there will also be a resulting drop in the price of flour. That loss must be sustained by the miller. However, since the miller has a contract to sell wheat at the older, higher price, the miller makes up for this loss on the flour sale by the gain on the wheat sale. Hedging is also employed by stock and bond traders, export-import traders, and some manufacturers. See also hedge fund.


 
Law Dictionary: Hedging
Top

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.

 
Economics Dictionary: hedging
Top

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.

  • Hedge funds, which are investment funds usually open only to the very wealthy, grew in the 1990s. The near failure of one such fund in 1998, Long-Term Capital Management, sent shock waves through Wall Street.

  •  
     

     

    Copyrights:

    Insurance Dictionary. Dictionary of Insurance Terms. Copyright © 2000 by Barron's Educational Series, Inc. All rights reserved.  Read more
    Britannica Concise Encyclopedia. Britannica Concise Encyclopedia. © 2006 Encyclopædia Britannica, Inc. All rights reserved.  Read more
    Columbia Encyclopedia. The Columbia Electronic Encyclopedia, Sixth Edition Copyright © 2003, Columbia University Press. Licensed from Columbia University Press. All rights reserved. www.cc.columbia.edu/cu/cup/  Read more
    Law Dictionary. Law Dictionary. Copyright © 2003 by Barron's Educational Series, Inc. All rights reserved.  Read more
    Economics Dictionary. The New Dictionary of Cultural Literacy, Third Edition Edited by E.D. Hirsch, Jr., Joseph F. Kett, and James Trefil. Copyright © 2002 by Houghton Mifflin Company. Published by Houghton Mifflin. All rights reserved.  Read more

     

    Mentioned in