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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