Series 3: 1.3.5.3. Hedging

1.3.5.3. Hedging

Hedging is an activity that seeks to protect an investor’s assets or liabilities from adverse price fluctuations by acquiring an opposite position in derivatives. Unlike speculation, which willingly accepts more risk to earn the possibility of additional profits, the primary purpose of hedging is to willingly cap profits to limit or reduce price risk. A holder of a large stock position might wish to hedge the risk of falling prices by purchasing an option on that stock. A farmer who has just planted 10,000 acres of wheat might want to hedge the risk of falling wheat prices by shorting a wheat futures contract in the month he expects to market his h