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What is a Hedge? Meaning.

A Hedge is the purchase or sale of a Call Option, 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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Compare with: American-Style Option  |  European-Style Option  |  Call Option  |  Put Option  |  Asian Option  |  Futures Contract  |  Hedging  |  Non-Systemic Risk  |  Systemic Risk  |  Portfolio Insurance  |  Short Selling

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