Hedging

Definition of 'Hedging'

Use of investments to manage commercial risk, or to minimise a potential loss to an existing position or known commitment.

By using two counterbalancing investment stragies, any losses caused by price fluctuations are minimised.

For example, a trader in commodities buys an amount of one particular item. At the same time he also makes a contract to sell an amount of a similar item at a later date.

Thus if the price of the item he has bought falls, he can still recover money by selling the similar item at the earlier, higher price.

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