Hedge
A position taken to offset potential losses from another position, reducing overall risk exposure.
Hedging opens a position to offset the risk of another, limiting losses and gains. It is an insurance strategy, common for protecting against currency moves.
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
Related Terms
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