Hedging

Hedging is protection against financial risks through offsetting transactions.

Classic example:

A wheat farmer doesn't know what his wheat will be worth at harvest in 6 months. TODAY he sells it via a futures contract at €250/tonne for delivery in 6 months. Whether the price rises or falls – he gets €250. Risk eliminated.

Where hedging occurs in everyday life:

• Airlines: hedge kerosene prices with futures (Lufthansa!)
• Exporters: hedge exchange rates (VW exports in dollars, but its costs are in euros)
• Property buyers: a fixed interest rate period is a form of hedging (protection against rising rates)

For private investors: hedging is usually NOT necessary. With a long-term ETF savings plan, the best "protection" is diversification and a long time horizon. Professional hedging with options and futures is complex and expensive.