What is Hedging in Investing?

Hedging is like buying Insurance for your money or business so that a bad price move does not hurt you too much. It does not guarantee extra profit; it mainly protects you from big losses.

Simple idea in daily life

Think of hedging like this:

• You buy bike insurance. You pay a small premium every year.

• If nothing bad happens, you “lose” that premium.

• If an accident happens, the insurance company pays, and your big loss becomes small.

In finance, hedging works the same way: you spend a little (or give up some upside) today so that a future bad move in prices, interest rates, or currency doesn’t damage you badly.

A very simple money example

Imagine you are an exporter in India and you will receive 10,000 US dollars after three months.
You worry: “What if the dollar falls against the rupee by then? I will get fewer rupees.”

To hedge, you can:

• Lock in today’s exchange rate with a forward contract, or

• Buy an option that gives you the right to convert dollars at a minimum rate.

If the dollar crashes later, your hedge gains value and covers the loss you face on your export payment. If the dollar goes up instead, your hedge might limit some of that extra benefit, just like insurance.

What hedging does and doesn’t do

• Hedging reduces risk and uncertainty. You can plan better because you know a worst‑case level.

• Hedging often costs money (fees, lower upside, or premiums).

• Hedging is not mainly about making more profit—it is about avoiding big shocks.

Where normal people see hedging

Even if you don’t trade currencies or derivatives, you use hedging ideas in life:

• Keeping an emergency fund to hedge against job loss.

• Taking health insurance to hedge against hospital bills.

• Diversifying investments (FD + mutual funds + gold) to hedge against one asset crashing.

In short, hedging means accepting a small known cost today so you don’t face a huge unknown loss tomorrow.