Question

What in finance does it mean when you 'hedge the risk'?

Answer 1

Hedging against risk means using financial instruments or market strategies to offset the risk due to adverse price movements. As per Risk-return trade off, the investments are about to gain ore if there is high risk. Then, the hedging of risk, therefore will be a reduction in potential profits also. Hedging is considered as a way to get portfolio protection. Hedging is done by using financial derivatives, such as options and futures contracts. In short, hedging is a risk management strategy employed to offset losses in investments.