Finance Professor: Five Hedging Techniques You Must Know

So far I have discussed how to identify risk and how to manage risk. Now it's time to get a little more sophisticated and explore hedging techniques.

Hedging is a process by which risk is reduced; however, I'll emphasize that unless you liquidate a position, all risk cannot be eliminated. Hedging can reduce most risk, but as you will see, sometimes you wind up trading one risk for another.

Also, recognize that hedging is typically a short-term strategy to protect long-term positions. It may also be utilized to complete an arbitrage transaction. However, you never want to apply a long-term hedging strategy to a short-term position, as that would be costly and add more risk in the long run.

Here are five essential hedging techniques that you'll learn about in this installment of "The Finance Professor": ...