Hedging means offsetting risk rather than trying to maximise profit. A coffee exporter who will receive dollars later might sell dollars forward so a weaker local currency does not hurt planning. An equity investor might buy put options or hold defensive assets when markets look unstable. Hedges cost money or cap upside, and imperfect hedges leave residual risk. The goal is usually smoother outcomes, not a free lunch.
Key takeaways
- A hedge reduces exposure; it does not remove every risk.
- Common tools include futures, options, forwards, and offsetting cash positions.
- Hedging can reduce gains as well as losses.
- Know what you are protecting before you choose the instrument.