hedge is a position taken in a security to offset or reduce the risk associated with the risk of another security.
Investors will often try to reduce the risk associated with a security or with the market as a whole. The inherent risk associated with all securities in the market place is known as systematic risk. An investor may look to hedge the risk associated with the market as a whole by purchasing puts on the S & P 500. If the value of the investor’s portfolio declines as a result of a decline in the over all market, the value of the puts will increase and the investor will have hedged or reduced their risk.
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