What is the meaning of Derivatives and Hedging?
Derivatives refer to financial contracts or securities that derive their value from an underlying asset. The value of derivatives is derived from the price, interest rate, or other variable of the underlying asset. These financial instruments can be used for various purposes, such as hedging against risks, speculation, or arbitrage.
Hedging, on the other hand, is a risk management strategy undertaken by individuals or businesses to offset or reduce the risk of adverse price movements in an underlying asset, commodity, or financial instrument. Hedging involves taking a position in a derivative product or asset that serves as a counterbalance to an existing or anticipated risk exposure. This helps protect against potential losses and stabilize returns, especially in volatile market conditions. The objective of hedging is to mitigate potential downside risks and provide stability to investment portfolios or business operations.