What is Hedging? Meaning, Strategies & More

If you’ve ever carried an umbrella even when the sky was only partly cloudy, you’ve already practiced hedging. You weren’t sure if it would rain, but you wanted to protect yourself just in case. In investing, hedging works in the same way, it is about reducing risk when the future is uncertain.

In the stock market, currencies, or commodities, hedging acts like insurance. You might pay a small cost or sacrifice some potential returns, but in return you reduce the chances of a large loss. Let’s dig in further into the world of hedging with this blog.

What Do You Mean by Hedging?

Hedging is a strategy investors and traders use to offset potential losses in one investment by taking an opposite position in another. Think of it as cricket: if your team’s batting lineup looks shaky, you want your bowlers to be strong enough to defend a low total. The balance reduces your overall risk.

What is Hedging in Trading vs Investing?

• For traders: Hedging is often short-term. A trader who buys Infosys shares may also buy a Nifty Put Option to guard against sudden market falls. Traders usually focus on quick, tactical hedges.
• For investors: Hedging is more about protecting wealth over years. An investor holding Reliance Industries, HDFC Bank, and Tata Consultancy Services might hedge by diversifying into gold, government bonds, or even US stocks like Apple or Microsoft.

Hedging in the Stock Market: Everyday Examples

• Indian example: Suppose you are bullish on Eternal but worried about a weak quarter. You can buy Eternal shares and simultaneously purchase a Put Option on Eternal in the F&O market. If Eternal shares fall, the option cushions your losses.
• Sector hedge: If you own HDFC Bank and ICICI Bank, you are exposed to financial sector risks. Buying an index Put on Nifty can act as a hedge for your entire portfolio.
• US example: Imagine you are bullish on Nvidia and Tesla, but global markets look shaky. If you were a US trader, you could hedge using options on Nasdaq 100. But as an Indian investor, you don’t have access to US F&O markets. Instead, you can hedge by diversifying into defensive US stocks like Johnson & Johnson or Coca-Cola.

What is Hedging in Forex?

Hedging is very common in foreign exchange. Exporters and importers often use it to protect against currency swings. For example, an Indian IT company like TCS earns revenues in dollars. If the rupee strengthens, its revenues fall when converted back. To hedge, TCS may use currency forwards to lock in today’s exchange rate.

For individual investors, just buying US stocks is a form of currency hedge. If the rupee weakens against the dollar (as it has over decades), your US portfolio automatically gains in INR terms.

Types of Hedging and Instruments

There are multiple ways to hedge depending on your risk appetite and portfolio:

• Derivatives (Futures & Options): Common in India. For example, buy Reliance shares and hedge with a Short Reliance Future.
• Gold: Traditionally considered a safe haven. Many Indian investors hold gold ETFs alongside equity portfolios.
• Diversification: Holding a mix of sectors, or adding US tech stocks like Apple, Microsoft, and Amazon along with Indian blue chips.
• Currency Hedge: For Indians investing abroad, INR depreciation works as a natural hedge.
• Inverse ETFs (in US markets): Investors can use these to profit when indices fall.

Hedging Strategies for Indian Investors in US Stocks

Here’s the reality: Indian investors don’t have access to US options and futures. So how do you hedge your Apple or Nvidia holdings?

• Diversification within US markets: Balance high-growth tech names (like Tesla, Microsoft, Nvidia) with defensive stocks (like Procter & Gamble, Johnson & Johnson).
• Balance across geographies: Hold both Indian and US equities. If India faces market pressure while the US rallies, your global allocation cushions your portfolio.
• Use Gold and Debt: Adding Gold  or debt funds in India reduces volatility from US equity bets.
• Currency advantage: Even if your US stocks remain flat, a weakening rupee makes them more valuable in INR. That itself is a hedge.

For example, if you bought Apple shares at $150 when the dollar was ₹75, your cost was ₹11,250 per share. Even if Apple remains at $150, but the dollar moves to ₹85, your share is now worth ₹12,750, simply because of currency movement.

Why Hedging Matters?

Markets are unpredictable. Infosys may surprise with results, Tesla may face production delays, or the rupee may swing sharply. Hedging ensures you don’t get caught off guard. It may limit some upside, but it gives you peace of mind.

For Indian investors, hedging is easier in local markets through F&O. For US markets, hedging is about smart diversification and embracing the currency hedge you already get by investing abroad.

Hedging is not about predicting the future. It is about preparing for it. Just like carrying that umbrella on a partly cloudy day, it may or may not rain, but you’ll be glad you had it when it does.

As Indian investors, whether you are holding Reliance or Infosys in India, or Apple and Microsoft in the US, having a hedging strategy ensures your wealth weathers the inevitable storms of the market.

Disclaimer:

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