Hedging
Taking an offsetting position to reduce the loss an existing exposure would suffer from an adverse move.
Formula
Hedge Ratio = Value of Exposure x Beta / Contract Value of the Hedging Instrument
Unit
ratio (x, times)
In depth
A hedge is a deliberate reduction of both loss and gain, so a perfectly hedged position earns approximately the risk-free rate — which is the point people miss when they expect a hedge to protect the downside and keep the upside. It costs money, either as an option premium or as forgone return, and that cost is continuous. Basis risk means most hedges are imperfect: hedging a portfolio with index futures leaves the difference between portfolio and index unhedged. Hedging is not the same as speculating on the other side; a hedge exists only relative to an underlying exposure.
Worked example
A ₹36,00,000 portfolio with a beta of 1.0 is hedged with 36,00,000 / (24,000 x 75) = 2 Nifty lots sold. If the market falls 10% the portfolio loses ₹3,60,000 and the futures gain approximately the same, leaving the position flat.
Illustrative figures, chosen so the arithmetic is easy to follow. Not a live price and not a valuation of any company.
Educational reference only
This entry explains what “Hedging” means. It is not investment advice and not a recommendation to buy or sell any security. Any numbers above are illustrative, not live prices, and nothing here predicts price direction or rates a stock. Consider your own circumstances and consult a SEBI-registered investment adviser before acting.