Hedging - Financial definition

In finance, hedging involves employing various financial instruments or strategies to mitigate the risk of adverse price movements in an asset or investment. It is commonly used by investors and businesses to protect against potential losses caused by fluctuations in market prices, interest rates, currency exchange rates, or commodity prices.

For example, a company that relies on importing goods from overseas may use currency hedging to protect against adverse exchange rate movements. Similarly, an investor holding a portfolio of stocks may use options contracts to hedge against potential market downturns. Hedging strategies can vary widely depending on the specific risks being managed and the preferences of the hedger, and may involve complex financial instruments such as futures contracts, options, swaps, or structured products.