Monday, August 26, 2013

What is Hedging?

Simply put, Hedging is making an investment to reduce the risk. 

Businesses can hedge their risks by using forward contracts, customer over-the-counter derivatives, and futures contracts, like dual-entry accounting, hedging always has two side-a cash market component and a future position component. We therefore speak of firms being ‘long’ or ‘short’ in their cash market position just like we speak of firms being long or short in their hedged position.

An example of a hedge would be a retail chain that buys men’s suits from European designers, hedging against a rising exchange rate (Dollar falling against the Euro).

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