A hedge is a strategy to reduce the risk of adverse price movements in an asset. It can be used to minimize or offset the chance that your assets will lose value. It also limits your loss to a known amount if the asset indeed does lose value.
There are three situations where you can hedge:
- Protect Profits: You can hedge a position to protect the profits your had so far.
- Mitigate Losses: You can hedge a position to mitigate or even reverse a loss.
- Portfolio Protection: You can develop a hedging system for your entire portfolio.
Example
