A beginner's guide to hedging

I am interested in hedging since we wrote a first case study in the class. Thus, I wanted to find out more articles about hedging. This article says if you are not familiar with word "hedging", and then you can think of insurance. However, I do not agree with that.Under insurance, there are no chances to occur unexpected events (random variable). For example, he or she is injured from a car accident, and then he or she will get benefits, which specified amounts in an insurance contract from the insurance company. In case of bankruptcy of his or her insurance company, he or she still can get benefits because every insurance company should re-insure to other insurance companies. Therefore, insurance makes people to estimate their expected loss or benefits more accurately.Under hedging, people cannot guarantee how much they will make profits or whether hedging can help them in the specific seasons. Therefore, hedging is less likely to accurate estimating their expected loss or benefits. However, some types of hedging have similar aspects of insurance, and that is an option. For example, he or she buys stock A for long-term investment, and he or she is worried about short-term loss and buys a put option, hedging or a derivative, for $30 per share. In case of dropping stock price to $15, he or she who bought a put option can sell those stocks at $30. Therefore, shareholders could estimate their expected loss in the worst case accurately. Another example we can simply find at an airline. Due to oil crisis, many airlines have huge impact on oil expenses. If an airline A made a contract, which locking oil prices for 6 months or more with oil distributors, the airline A would not have any impact on oil crisis.In conclusion, insurance and hedging also have a cost, so hedging might not be the best choice sometimes. Thus, I recommend people to consider whether they take hedging or not.

http://www.investopedia.com/articles/basics/03/080103.asp