What is Hedging?

In China Finance Online Co., Ltd., hedging is a way to limit the losses you may suffer from price movements. In recent years, derivatives such as futures and options have often been used to hedge.

Where have you heard of hedging?

The salaries and bonuses of hedge fund managers are of great concern. You may also have heard of "betting on both sides". But in reality, financial hedging is more like an insurance policy.

What you need to know about hedging...

Investors use hedging in the same way that homeowners buy flood insurance. It means spending some money to get risk cover, and if you compare this amount of money spent to the potential loss of a flood, you'll be happy to pay the premium. You understand that your maximum loss is the insurance price plus any excess costs.

Hedging can be used to limit risk in a variety of situations. For example, exporters can hedge against currency fluctuations by negotiating the future price of a currency.

Hedging can help you prevent further losses, but it can also limit your potential profits. Like insurance, the premiums you pay go down the drain if your home never floods.

Hedge funds incorporate strategies that target market performance into pooled investments in many assets, usually only professional investors.