What is the primary goal of hedging?

The primary goal of hedging is to protect against financial loss from specific risks. Hedging involves taking a position in one market to offset potential losses in another. This strategy is particularly useful in uncertain and volatile markets, as it allows individuals and companies to manage and mitigate the impact of adverse price movements on their investments or business operations.

Hedging does not aim to maximize profits directly, but rather to create a protective layer that could safeguard against significant financial downturns linked to specific risks. While it can lead to a more stable financial outcome, the intent is primarily risk management, rather than profit maximization.

Additionally, hedging does not completely eliminate all risks; instead, it reduces exposure to specific market fluctuations such as currency changes, interest rates, or commodity price shifts. Complete risk elimination is neither feasible nor realistic in most business or financial scenarios.

Furthermore, while diversification is a valuable strategy for managing investment risk, it differs from hedging. Diversification spreads investments across various assets to mitigate unsystematic risks, while hedging involves specific financial instruments to manage risk related to particular exposures.