Discipline: Economics

Hedging is a financial method to protect financial positions in commodities, currencies, or securities against changes in price levels.

Hedges can be used in different ways, depending on the protection that a certain position requires. For example, in order to hedge the risk of a long position in a stock, one may consider buying a put option, which will give the stockholder the option to sell it with a certain price if the stock loses value. Hedging a currency position. however, requires a different method. For example, if an exporter sells commodities, and expects payment in a foreign currency on a future date, then selling the currency's futures may protect the exporter against any changes in the currency value.

Also see: currency risk, exchange rate


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