A hedge is a position or arrangement intended to offset a specified risk in another holding or commitment. The same trade can be a hedge for one participant and a speculative bet for another, depending on what exposure it accompanies.
Judge the combined position
Consider a simplified example: one unit of an asset is held at 100, alongside a linear short covering one matching unit at 100. If both prices fall to 90, the asset loses 10 and the short gains 10. The combined price result is zero, assuming identical price movements, matching units and no fees, funding or other costs.
If both prices rise instead, the short’s loss offsets the asset’s gain under those same assumptions. This illustrates why a hedge can reduce upside as well as downside.
Identify what remains unprotected
Real hedges may cover only part of an exposure. Different assets, settlement currencies, price references or maturities can leave residual risk. Margin demands and the ability to exit each leg also matter.
A platform’s “hedge mode” merely permits certain opposing positions to coexist; it does not establish that their risks cancel. Effective assessment starts with the risk being offset and the relationship between the positions.