Crypto and derivatives · updated October 21, 2026
What is hedging and how does it work
Hedging means making an investment that gains exactly when another one loses, to shrink your total loss. It is like insurance: you pay something, and if the blow comes, you lose less.
How it works
The simplest example: you own shares and buy put options on them. If the price falls, the options gain. Companies do the same with currencies and commodities: a European exporter who will be paid in dollars in six months can lock in today's exchange rate so it does not lose if the dollar weakens.
Worked example
You own 100 shares at $50 ($5,000). You buy a put with a $45 strike and a $1 premium. The stock falls to $35.
Without protection you would have lost $1,500. With it you lost $600. If the stock had risen, you would have lost only the $100 spent on the premium.
Worth knowing
Hedging does not raise your gains; it makes them more predictable. The cost of protection lowers your return in good years.
When hedging can fool you
Protection has a price: if you buy it often, it adds up. Imperfect hedge: if you hedge with an index and your stock falls for its own reasons, the index may not fall at all.
Related terms
Learn it in the Academy
Questions about hedging
Do I need to hedge as a long-term investor?
Usually not. If you invest for many years, diversification and a cash reserve are cheaper protection than options.
What does a "hedged" ETF mean?
An ETF that hedges its currency risk. For example, a euro-hedged S&P 500 ETF removes the effect of the dollar-euro exchange rate on your return.
These explanations are for information only. They are not a recommendation to buy or sell.
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