What is Hedge?
Hedge (pronounced “rédje”) is a financial protection strategy. It’s like an insurance policy for your investments. If you’re afraid that the dollar will rise and hurt your costs, you can do a currency hedge to protect yourself.
Practical Examples
Currency Hedge
- A company that imports products buys dollar futures contracts
- If the dollar rises, the contract compensates for the loss
Hedge in Stocks
- An investor buys put options to protect their portfolio
- If the stocks fall, the put option increases in value and compensates
Hedge with Gold
- Investing part of the portfolio in gold
- Gold tends to rise in times of crisis (protects the rest of the portfolio)
Hedge for Individuals
You don’t need complex derivatives. Simple forms of hedge:
- Dollarizing part of the portfolio — international ETFs (IVVB11)
- Tesouro IPCA+ — protects against inflation
- Diversification — the most basic form of hedge
- Emergency reserve — protects against unforeseen events
Cost of Hedge
All protection comes with a cost. Just like car insurance, hedge reduces your potential gain in exchange for limiting your losses. The balance between protection and cost is personal.