Definition Hedge. Description.
A Hedge is the purchase or sale of a
Put Option or
Futures Contract as a temporary
substitute for a transaction to be made at a later date. The purpose of a
hedge is to avoid or minimize exposure to an unwanted business risk,
by purchasing on both sides of a risk, so that any loss in one security is
countered by gains in the other securities. A hedge can be seen as some kind
of Portfolio Insurance.
Usually it involves the initiation of a position in a futures
or options market that is intended as a temporary substitute for the sale
or purchase of the actual commodity.
Typical Risks that are hedged are: Interest Risk, Equity Risk,
Credit Risk and Forex Risk.
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| European-Style Option
| Call Option |
Put Option |
Asian Option |
Futures Contract |
Non-Systemic Risk |
Systemic Risk |
| Short Selling