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Hedging StrategyDownload the FREE Guide to the Top Sources of Passive Income
Hedging Strategy. How to use money market hedging and financial hedging to your advantage and make money off it. Financial HedgingIn investment analysis, Billingsley defined a hedging transaction in this way: a hedging transaction is intended to reduce or eliminate the risk of a primary or preexisting security or portfolio position. An investor consequently establishes a secondary position to counterbalance some or all of the risk of the primary investment position. Money Market HedgingThus, an equity mutual fund manager would not completing get out of equities if the market is expected to fall, but instead seek to partially offset the risk on the investment by taking short positions in selected equities, buying or selling derivatives, or some combination thereof. Substitute for Preferred ActionAnother interesting way to view hedging is that it is a substitute for the investor’s preferred action. As Billingsley notes, a hedging transaction could be a substitute for the investor’s preferred action in the absence of constraints that interfere with taking that action. Possible constraints include:
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