In finance, hedging is the idea that firms/individuals can reduce the impact of bad outcomes by shooting for an opposite payoff. i.e., say they take the short position in a given stock. To hedge is to take the long position on the same stock to minimise any potential bad impacts of the short position.
But hedge positions can take all sorts of forms, not just in taking the opposite stock position.
- Natural hedges are when operational choices can be made to reduce exposure to uncertainty.
- Financial hedges are when a financial contract is created/exists which will generate the desired payoff.