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Market Intelligence › Basic Terminologies
Risk removal, risk transfer, and how much is worth paying for it
Published by The Retail Trader · AUG 06, 2026 · Risk Management
Hedging is a way to reduce risk, but it is not free. It is important to understand the cost, a hedge in itself becomes a huge loss.
A hedge often hedges some of the downside by protecting some of the upside — like taking an offsetting position.
A hedge like insurance is different — you pay a premium on the vehicle and get protection against a large loss in return. Premium goes away, whether something happens or not.
This question clarifies the hedge decision:
• What percentage of the portfolio's expected return is the annual cost of the hedge?
• Which exact scenario do you want to avoid — the entire market or a single position.
• Can the same effect be achieved cheaper by reducing the position size?
• When will you hedge – whether it has an exit plan or not.
The cheapest hedge for most retail portfolios is position size, no derivatives. Hedges make sense when it is necessary to hold the position – it is always cheaper to reduce the size if the choice is made.
This article is for educational purposes only. It is not a buy or sell recommendation, a claim of guaranteed returns, or advisory guidance. Exchanges, SEBI and RBI change rules, rates and procedures from time to time, so verify every figure with your broker or an official source.