A practice that reduces the risk of holding one asset, by taking a position in a related asset. Hedging is based on the principle that cash market prices and futures market prices tend to move up and down together. This movement is not necessarily identical, but it usually is close enough that it is possible to lessen the risk of a loss in the cash market by taking an opposite position in the futures market.
A hedge is the buying or selling of a futures contract for protection against the possibility of a price change in the physical commodity that the business is planning to buy or sell. There are two types of hedges: a long hedge and a short hedge.