Hedging

Hedging refers to an investment strategy designed to reduce or eliminate the risk of adverse price movements in an Asset. This is typically achieved through the use of financial instruments such as Options, futures, or other derivatives that provide a way to offset potential losses in an investment.

For example, if an investor owns Shares of a Stock that they expect may decline in value, they might purchase put Options for that Stock. A put option gives the investor the right to sell the Stock at a predetermined price, thus limiting potential losses.

In another case, a farmer expecting to harvest a crop in the future might sell futures contracts for that crop to lock in a price. If the market price falls by the time of harvest, the farmer is protected against losses because they can still sell at the higher, locked-in price.