What is Hedging?

Answer:
One way to understand hedging is to think of it as

“protection” or “insurance.” Although hedging doesn’t prevent something bad from happening – it can ease the impact of an event. For instance, if you purchase automobile insurance you’re “hedging” against a vehicle collision. Investors use hedging techniques to limit their risks in the financial market.

As an investor, hedging may allow you to make money on your investments and reduce your potential loss; however, at the same time, reduced risk also means reduced profits. All types of investors may choose to utilize hedging techniques to limit their risks in the ups and downs of the financial market. With the use of financial derivatives, such as options and futures, investors are able to develop trading strategies and offset or “hedge” one investment by making another investment.

As with any investment, you should consult your portfolio manager or financial advisor to make sure your investment strategy is the best one for you.