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Answer Posted / prasanna11149@yahoo.co.in
In finance, a hedge is an investment that is taken out
specifically to reduce or cancel out the risk in another
investment. Hedging is a strategy designed to minimize
exposure to an unwanted business risk, while still allowing
the business to profit from an investment activity.
Typically, a hedger might invest in a security that he
believes is under-priced relative to its "fair value" (for
example a mortgage loan that he is then making), and
combine this with a short sale of a related security or
securities. Thus the hedger is indifferent to the movements
of the market as a whole, and is interested only in the
performance of the 'under-priced' security relative to the
hedge.
2).Process of protecting oneself against unfavorable
changes in prices. Thus one may enter into an offsetting
purchase or sale agreement for the express purpose of
balancing out any unfavorable changes in an already
consummated agreement due to price fluctuations. Hedge
transactions are commonly used to protect positions in (1)
foreign currency, (2) commodities, and (3) securities.
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