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, MBA Finance & Statistics, The University of Chicago Booth School of Business (1982)

In finance, hedge means to take a position expected to make money if your main position loses money. If you like a stock but think the stock market will not do well, you might buy the stock and go short the market with a future. Or you might buy property in a foreign country but sell the currency short to hedge the currency risk.

The other major tactic for reducing risk is diversification. But to reduce risk via diversification, you need to reduce your position and replace the reduction with another position. Hedging allows you to maintain your full position. The other difference is diversification works best with uncorrelated assets. Hedging requires positions that have large negative correlations.

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