Hedging

A technique for limiting risk.

REMARKS

The process whereby an institution buys or sells a financial instrument in order to offset the risk that the price of another financial instrument will rise or fall.

For example if a price movement would cause loss, a purchase is made of an options or futures contract giving the opposite result; if a rise in interest rates causes loss, a position is taken with interest rate options/futures so that a rise in interest rates will yield a profit.