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An investment or strategy designed to reduce the risk of adverse price movements in an existing position or portfolio.
Hedging is essentially buying insurance for your portfolio. A stock investor might buy put options to protect against a market decline. An international investor might use currency futures to hedge against exchange rate fluctuations. A farmer might use commodity futures to lock in a selling price. While hedging reduces risk, it also has a cost (the premium paid for options, for example) and typically limits upside potential. Perfect hedges are rare; most hedges reduce but do not eliminate risk. The goal is not to profit from the hedge but to limit potential losses.