Hedging

Taking a position that offsets a risk already carried, so that a loss on one is matched by a gain on the other. It trades away part of the upside to remove part of the downside.

An exporter expecting $10 million in six months can sell those dollars forward at ₹85.20 and lock in ₹85.2 crore whatever the rupee does. If the rupee weakens to ₹88, it has given up ₹2.8 crore it would otherwise have had; if it strengthens to ₹82, it has saved ₹3.2 crore. The hedge was neither a mistake in the first case nor a success in the second. It removed the question, and that's what you paid it to do.

Hedges cost money, through option premiums, forward points or forgone gains, and an imperfect hedge can leave a different risk behind, such as a mismatch in timing or amount. A business that already earns and spends in the same currency has a natural hedge and may need no contract at all.

Judge a hedge by the risk removed, not the profit made.