Hedging with Derivatives

Hedging with derivatives is a risk management strategy used to mitigate potential losses or gains in a portfolio by taking positions in financial instruments that offset or "hedge" against those risks. This involves buying and selling derivative contracts, such as options, futures, or swaps, that have values tied to the performance of an underlying asset, like stocks, bonds, or commodities.

What are Derivatives?

Derivatives are financial instruments whose value is derived from a separate entity, known as the underlying asset. They allow traders and investors to speculate on the future price movements of these assets without actually owning them. The value of derivatives can rise or fall with changes in the market value of their underlying assets. In the context of hedging, derivatives are used to protect against potential losses due to adverse price movements in an investment portfolio.