Hedging…….The Original Insurance

Abstract

The option to Hedge in order to minimize risk. Hedging is a powerful tool of insurance, when used judiciously. Hedging can be done with options, with the advantage of protection from additional loss, while retaining the entire upside/downside (depending whether the option is a call or a put). This does have a cost associated with it, viz. the option premium which is like an upfront payment for insurance. In other words, hedging comes at a cost: it can either sacrifice potential profits, or participate in profits, but at a cost (premium) which lowers potential profits.