Hedging is a risk management strategy used to reduce potential losses from adverse price changes in assets, exchange rates, interest rates, or other financial indicators. The main goal of hedging is to protect against unforeseen market fluctuations.
Types of hedging:
- Long hedge: Protection against rising prices of an asset that is planned to be purchased in the future.
- Short hedge: Protection against falling prices of an asset that is planned to be sold.
Advantages of hedging:
- Reduction of risks associated with market fluctuations.
- Increased stability of financial planning.
Disadvantages of hedging:
- Limitation of potential profits if the market moves in a favorable direction.
Hedging is widely used by companies, investors, and financial institutions to minimize risks and protect capital.
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