A protective maneuver is; a transaction intended to reduce the risk of loss from price fluctuations.
What is Hedging?
Hedging is a risk management strategy used to reduce the potential impact of unfavorable price movements in a particular asset. It involves taking an offsetting position in another asset or financial instrument in order to reduce the exposure to the price risk of the original asset.
In financial markets, hedging can be used to reduce the risk of investments in stocks, bonds, commodities, currencies, and other assets. For example, a hedge fund manager might hedge a portfolio of stocks by taking a short position in stock index futures. This would reduce the fund’s exposure to the overall market risk and help to protect against losses in the event of a market downturn.
Hedging can also be used by corporations to reduce the risk of fluctuating prices in the commodities they use, such as oil, natural gas, or metals. For example, an airline might hedge the price of jet fuel to protect against price spikes that could negatively impact its profits.
In general, hedging is an important tool for managing risk in financial markets and can help investors, corporations, and other market participants to reduce the potential impact of unfavorable price movements and to protect their portfolios. However, hedging is a complex and technical strategy, and it is important to understand the potential costs and risks involved before entering into a hedging position.
