Hedging

Hedging is a risk management strategy used to offset potential losses by taking a position in a more stable or safer asset. For instance, an investor might buy a risky stock and offset the risk by investing in a stable commodity, thus reducing overall exposure to market fluctuations. In the derivatives market, hedging is commonly used by merchants and businesses to protect against unfavorable price movements in commodities, currencies, or other assets. This is often done through futures or options contracts, which allow traders to lock in prices or gain protection from price volatility, thereby mitigating potential losses.