Hedging is a risk management strategy employed to offset losses in investments by taking an opposite position in a related asset
. It is used by investors and money managers to reduce and control their exposure to risks
. Hedging can involve various strategies, but is most commonly done with options, futures, and other derivatives
. Some examples of hedging include:
- Purchasing insurance against property losses
- Using derivatives such as options or futures to offset losses in underlying investment assets
- Opening new foreign exchange positions to limit losses from fluctuations in existing currency
Hedging is not a commonly used trading strategy among individual investors, and it is typically implemented at some point after an initial investment is made
. It may not make sense for long-term investors, as the costs involved with hedging may outweigh the potential benefits
