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Glossary Term: HEDGING

Definition(s) for HEDGING:


1. ) refes to a strategy designed to decrease investment risk using call options, put options, short selling or futures contracts. A hedge can help lock in existing profits. Examples include a position in a futures market to offset the position held in a cash market, holding a security and selling that security short and a call option against a shorted stock. A perfect hedge eliminates the possibility for a future gain or loss. An imperfect hedge insures against a portion of the loss.

2. ) The practice of offsetting the price risk inherent in any cash marketposition by taking an equal but opposite position in the futures market.Hedgers use the futures markets to protect their businesses from adverse pricechanges. See Selling (Short) Hedge and Purchasing (Long) Hedge.

3. ) The purchase or sale of a derivative security (such as options or futures) in order to reduce or neutralize all or some portion of the risk of holding another security.

4. ) Taking action to neutralize risk. Investors, dealers, and bankers hedge in various markets, including the stock, option, foreign exchange, and commodity markets. Hedging entails controlling the risk of one transaction by engaging in an offsetting transaction.

5. ) A strategy to offset the negative effects on the return of a primary position, for example, a stock portfolio, by taking a secondary position in derivative products.


See Also:
MACRO HEDGING, MICRO HEDGING, CROSS-HEDGING


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