Most of us are engaged in hedging in some way in our daily lives. When you buy life or medical insurance to support your family in the case of your death or an accident/injury, this is a hedge. With homeowner’s insurance, we are hedging ourselves against break-ins, fires and other unforeseen occurrences. Hedging is a key strategy that can help us protect our homes, cars, businesses and portfolios from uncertainty.
We pay monthly sums to insurance companies for the coverage that they provide in the areas of household, medical and life insurance. While the textbook definition of hedging is an investment taken out to limit the risk of another investment, insurance is a prime example of a ‘real-world’ hedge.