hedging


hedging

Method of reducing the risk of loss caused by price fluctuation. It consists of the purchase or sale of equal quantities of the same or very similar commodities in two different markets at approximately the same time, with the expectation that a future change in price in one market will be offset by an opposite change in the other market. For example, a grain-elevator operator may agree to buy a ton of wheat and at the same time sell a futures contract for the same quantity of wheat; when the wheat is sold, he buys back the futures contract. If the grain price has dropped, he can buy back the futures contract for less than he sold it for; his profit from doing so will be offset by his loss on the grain. Hedging is also common in the securities and foreign-exchange markets. See also stock option.

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