Taking an opposite or offsetting position in a derivative instrument or any other type of financial instruments with regard to a position previously held in the cash market. This intends to reduce or mitigate the risk of financial loss from unfavorable price movements. Hedging may also involve the purchase or sale of futures contracts as a temporary substitute for a money market transaction that would be made in the future.

An investor can hedge, for example, a long position in a cash commodity by owning that commodity or a short cash position by planning to purchase it in the future.