To "hedge" means to protect yourself against an adverse market move by opening a position that gains value precisely when the original position loses, fully or partially offsetting that loss.
Common examples
- An exporter who will be paid in dollars in three months buys a futures contract on the exchange rate to lock in today the price at which they'll convert those dollars.
- An investor with a stock portfolio buys put options that rise in value if the market falls.
The cost of hedging
Hedging isn't free: it usually means paying a premium (for options) or giving up part of the potential gain (with futures), in exchange for reducing uncertainty. Whether or not to hedge depends on how much risk you're willing to accept versus the cost of eliminating it.