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Glossary
Instruments

Hedge

A position taken to offset a risk you already have.

A hedge is insurance, not a bet. An airline buying oil futures is not speculating on oil; it is fixing a cost so that a price spike cannot destroy it.

Like all insurance, it costs money and reduces your upside. A perfectly hedged position makes nothing. That is not a failure of the hedge, that is what you bought.

Figure

The fee you never see

Ask 100.06, you buy hereBid 100.00, you sell hereThe spread. That is the fee.

You buy at the ask and sell at the bid, so you are down the spread the instant you trade. In an illiquid stock it dwarfs any commission you thought you were avoiding.

Why it matters

It is how businesses and portfolios survive events they cannot predict.

The mistake everyone makes

Calling a speculative position a hedge. If it makes money when nothing bad happens, it is a bet.

Related terms

Derivative
A contract whose value is derived from something else.
Option
The right, but not the obligation, to buy or sell at a set price.
Futures
A binding agreement to buy or sell something at a set price on a set date.

See Hedge on a real company

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