Legal Definitions - hedge

Definition: To use two transactions that balance each other out to ensure that you don't lose money; to make arrangements in advance to protect yourself from losing money on an investment, speculation, or bet. For example, a buyer of commodities might buy insurance to protect against unfavorable price changes.

Example: Let's say you own a company that relies on a certain commodity, like oil, to make your products. You're worried that the price of oil might go up, which would hurt your profits. To protect yourself, you could buy futures contracts for oil at the current price. If the price of oil goes up, you'll make money on the futures contracts, which will offset the higher cost of buying oil for your company. If the price of oil goes down, you'll lose money on the futures contracts, but you'll save money on buying oil for your company. Either way, you're protected from losing too much money.

This example illustrates the definition of a hedge because the company is using a transaction (buying futures contracts) to offset the risk of losing money on their investment in oil. By doing this, they're ensuring that they won't lose money no matter what happens to the price of oil.