Essential

Hedge

A position taken to offset potential losses from another position, reducing overall risk exposure.

Definition

Hedging involves opening a position to offset the risk of another position. It's an insurance strategy that limits potential losses (but also potential gains). Common in forex to protect against adverse currency movements.

How It Works

Long EUR/USD + Short EUR/USD = Hedged
Losses on one position offset by gains on the other
Reduces net exposure to market movements
Used by businesses to lock in exchange rates

Types of Hedge

Direct Hedge

Opposite position in same instrument

Cross Hedge

Position in correlated instrument

Options Hedge

Using options to limit downside

Trading Tips

Some brokers don't allow hedging (US regulations)

Hedging costs money (spreads, swaps)

Consider correlation between positions

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