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Hedging in Finance: Definition & Example

Instructions:

Choose an answer and hit 'next'. You will receive your score and answers at the end.

question 1 of 3

Which of the following definitions best defines hedging?

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1. If you buy 100 shares of a stock at $10 per share, and then hedge with 50 short shares of a similar stock at $5 per share, then both stocks drop by 20%, how much would you lose if you didn't hedge your investment?

2. If you buy 100 shares of a stock at $10 per share, and then hedge with 50 short shares of a similar stock at $5 per share, then both stocks drop by 20%, how much would you lose since you DID hedge your investment?

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About This Quiz & Worksheet

Answer these questions to make sure you understand how hedging works when investing. You will be asked to identify different ways an investor can hedge.

Quiz & Worksheet Goals

In this quiz/worksheet set you'll see what you know about:

  • Examples of hedging strategies
  • How shorting stocks figures into the hedging process
  • ETF's

Skills Practiced

  • Problem solving - use acquired knowledge to solve stock hedging practice problems
  • Defining key concepts - ensure that you can accurately define main phrases, such as hedging and ETF's
  • Information recall - access the knowledge you've gained regarding what some hedging strategies are

Additional Learning

You can find out more about this investment strategy by reviewing the lesson titled Hedging in Finance: Definition & Example. It will explain new information, such as:

  • Financial instruments used when hedging
  • Why investors choose to hedge
  • Investment options
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