Hedge or Hedging
As noun: strategy used to offset business or investment risk, in other words, it is a protection against a possible loss (by taking an action which is the opposite of an action taken earlier).
A perfect hedge eliminates the possibility of future gain or loss. Futures hedging income is ordinary taxable income, but futures hedging losses are capital losses and are deductible only to the extent of capital gain income [Friedman, p.326].
As verb: to protect against a possible loss [Bateman, McAdam, p.91].
To hedge, in finance, is to take an offsetting position in an asset or investment that reduces the price risk of an existing position. A hedge is a trade made to reduce the risk of adverse price movements in another asset. Normally, a hedge consists of taking the opposite position in a related security or derivative security based on the asset to be hedged.
Using a hedge is somewhat analogous to taking out an insurance policy. If you own a home in a flood-prone area, you will want to protect that asset from the risk of flooding—to hedge it, in other words—by taking out flood insurance. In this example, you cannot prevent a flood, but you can plan ahead of time to mitigate the dangers if a flood occurs. A risk-reward tradeoff is inherent in hedging; while it reduces potential risk, it also chips away at potential gains. Put simply; hedging isn’t free. In the case of the flood insurance policy example, the monthly payments add up, and if the flood never comes, the policyholder receives no payout. In the investment world, hedging works in the same way. Investors and money managers use hedging practices to reduce and control their exposure to risks. To appropriately hedge in the investment world, one must strategically use various instruments to offset the risk of adverse price movements in the market [Investopedia].
Bateman, H., McAdam, K. (2003). Dictionary of Economics. London: A & C Black Publishers Ltd.
Friedman, Jack P. (2012). Dictionary of Business and Economics Terms (Barron's Business Dictionaries) (5 ed.). New York: Barron’s Educational Series.
Hedge Definition: What It Is and How It Works in Investing. Investopedia. Retrieved from: https://www.investopedia.com/terms/h/hedge.asp