In This Chapter
Knowing when to hedge
Choosing your exposures
Monitoring and adjusting hedges
Taking hedges off at the right time
In financial terms, to hedge means to reduce risk by taking on an offsetting risk. A common example is buying insurance. You bet with an insurance company that your house will burn down this year. You pay £2,000 (the premium), and if you’re right, the insurance company pays you £500,000. Considered in isolation, this bet is risky, but it still reduces your risk because the combined value of your house plus insurance policy has less volatility than the value of the house alone.