Hedging is taking a position whose value moves opposite to an existing exposure, so a loss on one side is offset by a gain on the other. The exposure may be currency, interest rate or commodity price; the offsetting position may be a derivative or simply a matching commercial arrangement. No authority defines what counts as a hedge, because the question is one of economic intent and effect. The trap worth naming: whether something hedges economically and whether it qualifies for hedge accounting are separate questions, the second far stricter about documentation, designation and demonstrated effectiveness. The two frequently diverge, and a position that genuinely reduces exposure can still produce volatile reported earnings. Decide which of the two outcomes you are buying before you transact.
Why this entry carries no source list. This lexicon cites an official primary source wherever one exists and says plainly where none does. No body defines this term: it is commercial vocabulary, and what it means in any particular deal is whatever the document says. Citing a bank’s product page, an insurer’s brochure or a consultancy’s explainer would dress one firm’s usage as a general rule. The paragraph above therefore ends by naming what to read instead of the word.