Q&A: What is hedging?

Hedging is the process of protecting oneself against risk.

Hedging is trying to reduce uncertainty by buying (or selling) something in a futures market. So an airline might hedge against volatile aviation fuel prices by buying the fuel it thinks it will need ahead of time - say 6 months before. Say that it buys the oil now at $55 per barrel for delivery in 6 months .... that price is fixed. Ofcourse the price might decline to $40 and so the airline will take a hit - it is committed to buying at the hedged price. But the price might also reach $80 in which case the airline has made a good move, by hedging it has lowered uncertainty and reduced its costs.

Virgin Atlantic recently announced better than expected profits partly because of successful hedging of the global price of oil.

Take another example, a company who owes money to an overseas company may want to hedge against the risk that the exchange rate moves against them. They could do this by taking out a future contract for the purchase of foreign exchange at a fixed future rate

This BBC financial glossary is excellent

Martin Wolf on Global Shocks [10 Feb 2012]
Unit 2 Macro: Focus on China - Inflation [26 Jan 2012]
Unit 4 Macro: Focus on India - World’s Cheapest Computer [26 Jan 2012]
Unit 1 Micro: Can the UK Computer Games Industry Grow [24 Jan 2012]
Unit1 Micro: Processed Meat and Cancer Risk - Information Failure? [17 Jan 2012]
Unit 2 Macro: Look Upwards to Find the next Downturn [15 Jan 2012]
Unit 2 Macro: Frontier Markets - the New BRICS? [15 Jan 2012]
Essential Economics 2012 - the Economics Booster CPD Course (20 June 2012) [13 Jan 2012]
Unit 4 Macro: UK Bond Yields Reach Record Lows [11 Jan 2012]
Revision Presentation: Economics Evaluation Skills [10 Jan 2012]
Exam Advice: 10 Ideas for a Better Economics Paper [10 Jan 2012]
Unit 2 Macro: Factors Driving Business Investment [10 Jan 2012]
Unit 4 Macro: Natural Disasters and their Economic Impact [7 Jan 2012]
AS and A2 Economics - 10 Ways to Improve Evaluation [4 Jan 2012]
Exam Technique for Economics - Weesteps to Evaluation [2 Jan 2012]
Unit 1 Micro: Low Cost Airlines Beat the Recession [1 Jan 2012]
Unit 4 Macro: Exchange Rate Economics - Where next for the US Dollar? [31 Dec 2011]
Unit 1 Micro: Biomass Subsidies and Timber Prices [30 Dec 2011]
2012 - Carnage on the High Street [28 Dec 2011]
Unit 2 Macro: The UK Housing Market in 2011 [26 Dec 2011]
Unit 3 Micro: Sub Normal Profits - BP Leaves the Solar Industry [21 Dec 2011]
Economics of Deforestation [20 Dec 2011]
Unit 3 Micro: Oligopoly and Duopoly in Bus Markets [20 Dec 2011]
Unit 3 Micro: Patent Wars- A Touchy Subject for Apple [16 Dec 2011]
Unit 3 Micro: Tacit Collusion in the Supermarket [27 Nov 2011]
Unit 3 Micro: Brand Loyalty in Mobile Phones [27 Nov 2011]
Unit 1 Micro: 50 Years since the end of the Max Wage in Football [23 Nov 2011]
Beyond the Bike - What is the value of life in Africa? [19 Nov 2011]
Pasty Prices - Something to Chew Over [19 Nov 2011]
LSE Lecture: Daniel Kahneman - Thinking Fast and Slow [15 Nov 2011]
Unit 2 Macro: Should the EU introduce a Tobin Tax? [14 Nov 2011]
Unit 1 Micro: Asymmetric Information - Buying a Used Car [14 Nov 2011]
AS Macro: The State of British Business [13 Nov 2011]
OCR A2 Economics Unit F585 - January 2012 Exam Pre-release [9 Nov 2011]
Unit 3 Micro: Unilever hit by rising costs [6 Nov 2011]
Unit 3 Micro: Time of Use Pricing for Energy [2 Nov 2011]
Unit 3 Micro: Economies of Scale and the Kinect [31 Oct 2011]
Unit 1 Micro: Google Maps to Charge for Usage [31 Oct 2011]
Unit 3 Micro: Examples of Price Discrimination in Action [31 Oct 2011]
Unit 3 Micro: Price Discrimination in the E-Book Market [31 Oct 2011]
Unit 4 Macro: Should TNCs make full disclosure on factory wages? [30 Oct 2011]
Unit 3 Micro: UK Executive Pay - All in it Together? [29 Oct 2011]
Unit 1 Micro: Is the Sun Dipping on Solar Subsidies? [27 Oct 2011]
Unit 1 Micro: University fees and elasticity of demand [24 Oct 2011]
Unit 1 Micro: Economists attack food price speculation [24 Oct 2011]
Unit 3 Micro: Ofcom gives stamp of approval for flexible pricing in mail [21 Oct 2011]
Unit 3 Micro: Tesco Behaving Badly - Price Anchoring [17 Oct 2011]
Unit 4 Macro: World Food Day [16 Oct 2011]
Can the “invisible hand” solve Africa’s poverty? [13 Oct 2011]
Unit 1 Micro: Producing Coffee - Kenya in Pictures [4 Oct 2011]
Unit 3 Micro: Tube Drivers set to earn £50,000 a year [3 Oct 2011]
Unit 1 Micro: Homework Assignment on Market Prices [2 Oct 2011]
Unit 1 Micro: The Supply and Demand Rap! [28 Sep 2011]
Unit 1 Micro: Exercise on Equilibrium Market Prices [27 Sep 2011]
Putting the “discrimination” into price discrimination! [26 Sep 2011]
Unit 1 Micro: Drink Driving and Government Intervention [26 Sep 2011]
Unit 1 Micro: Exercise on Market Supply [26 Sep 2011]
Unit 1 Micro: Exercise on Market Demand [25 Sep 2011]
Unit 4 Macro: IMF Flags up Risks of Double Dip [20 Sep 2011]
Another Economics prop - for remembering MC=MR! [15 Sep 2011]
AQA AS ECON1 - Specification Resource Map [15 Sep 2011]
Unit 2 Macro: Economic Growth and Inequality [14 Sep 2011]
Study Note - What is Macroeconomics? [13 Sep 2011]
UK Macro: Risks of a Double Dip Recession [12 Sep 2011]
Unit 2 Macro: Value Added in Production and GDP [11 Sep 2011]
Starter Activity: Health Economics [1 Sep 2011]
Unit 3 Micro: Quiz on Business Costs and Profits [25 Aug 2011]
Unit 4 Macro: Baltic Dry Index and Global Weakening [19 Aug 2011]
Unit 1 Micro: The Price of Football [2 Aug 2011]
Monetary Policy Roundtable [25 Jul 2011]
Unit 1 Micro: Cotton Prices and the Retail Price of Clothing [13 Jul 2011]
Unit 1 Micro: Economics of Volatile Corn Prices [12 Jul 2011]
Zondle Game: 10 Question Quiz about OPEC [11 Jul 2011]
Unit 4 Macro: Dangers of High Inflation [11 Jul 2011]
Unit 3 Micro: Oligopsony - Dairy Losses Drive Farmers from the Fields [10 Jul 2011]
Unit 1 Micro: FirstBuy, Affordability and Effective Demand in Property [10 Jul 2011]
Unit 1 Micro: High price of petrol drains demand [9 Jul 2011]
Where there’s muck there’s brass [6 Jul 2011]
Nine Great Reasons for Economics & Business Teachers to use Twitter [28 Jun 2011]
Global Economy: Increased risk of future shocks [28 Jun 2011]
AS Micro: Fears over a century of hunger [22 Jun 2011]
AQA ECON4 Context [20 Jun 2011]
Macro Revision: Putting Things in Context [25 May 2011]
AS Macro: Preparing for Unit 2 (May 2011) [25 May 2011]
AS Macro Key Term: Supply-Side Policies [25 May 2011]
AQA Macro: Remember to revise inflation [25 May 2011]
AS Macro Key Term: Demand Pull Inflation [24 May 2011]
AS Macro Key Term: Deflation [24 May 2011]
AS Macro Key Term: Cost Push Inflation [24 May 2011]
AS Macro Key Term: Inflation [24 May 2011]
AS Macro Key Term: Recession [23 May 2011]
AS Macro Key Term: Spare Capacity [23 May 2011]
AS Macro Key Term: The Output Gap [23 May 2011]
A2 Micro: Competition Policy [20 May 2011]
A2 Micro: Oligopoly and Collusion [20 May 2011]
A2 Micro: Oligopoly [20 May 2011]
A2 Micro: Price Discrimination [19 May 2011]
A2 Micro: Entry Barriers in Markets [19 May 2011]
A2 Micro:  Monopsony Power in Markets [19 May 2011]
A2 Micro: The Importance of Profit [19 May 2011]

ECONOMICS TEACHER RESOURCE NEWSLETTER

Join over 6,000 other Economics Teachers in the UK and around the world who receive the tutor2u regular Economics Resource Email Newsletter. Get special offers, first news of latest resources, teaching ideas, conferences and workshops + loads of great ideas for teaching economics from our blog authors.