Hedging

A risk management technique used to neutralize or manage interest rate, foreign currency, equity, commodity or credit exposures by taking an opposite position in the same or a similar risk. For example it eliminates a risk of a market decline through the spot sale of the risk or through a transaction in an instrument that represents an obligation to sell the risk in the future. This can be done by making use of derivative contracts The goal is to ensure that any profit or loss on the current sale or purchase will be offset by the loss or profit on the future purchase or sale.