Hedging

Hedging is a strategy that reduces exposure to adverse changes in prices, rates, or other risks, often by taking an offsetting position.

Derivative (finance): A financial contract whose value depends on an underlying asset, rate, index, or event. Derivatives let hedgers offset price and rate exposure without trading the underlying asset.
Currency risk: The possibility that exchange-rate movements will change the value of assets, liabilities, or cash flows. A firm can hedge foreign-currency revenues or costs against exchange-rate changes.
Speculation (finance): Taking a financial position to profit from expected market movements while accepting the associated risk. Speculation seeks exposure to price changes; hedging seeks to reduce an existing exposure.
Hedge accounting: Accounting rules that align the recognition of gains or losses on a hedge with those on the hedged exposure. Accounting treatment can affect how a hedge appears in reported earnings.
Futures contract: A standardized exchange-traded agreement to buy or sell an asset at a set price on a future date. A futures position can offset the risk of a future purchase or sale.
Interest rate risk: The possibility that changes in interest rates will affect the value of investments or the cost of borrowing. Borrowers and investors hedge rate exposure to stabilize payments or portfolio values.
Arbitrage: A strategy that seeks profit from price differences between equivalent or related assets in different markets. Arbitrage exploits price discrepancies rather than primarily offsetting an existing risk.
Mark-to-market accounting: The practice of recording assets and liabilities at current market value. Market valuation can make hedge gains and losses visible before the underlying exposure is realized.
Forward contract: A private agreement to exchange an asset at a specified price and date in the future. Forwards let businesses tailor a hedge to their expected transaction.
Commodity price risk: The possibility that changes in commodity prices will affect costs, revenues, or asset values. Producers and buyers hedge to reduce uncertainty in future commodity prices.

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