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Hedge or Hedging – Explained + Examples

In investing, a hedge is a strategy used to reduce or offset the risk of adverse price movements in an asset. This is typically done by taking a position in a related security or asset that is expected to move in the opposite direction of the asset being hedged.

For example, if an investor owns a stock that they believe may decline in value, they could hedge their position by purchasing a put option on that stock. If the stock does indeed decrease in value, the put option will increase in value, offsetting some of the losses from the decline in the stock price.

Hedging is often used by investors to protect against potential losses, but it can also limit potential gains. There are many different types of hedging strategies, including using derivatives such as options and futures contracts, as well as diversifying investments across different asset classes.

Some examples of how hedging works in investing:



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