Hedging means reducing or eliminating risk from adverse price movements in an asset. Derivatives allow investors or businesses to lock in prices, protecting against volatility. It acts as a form of insurance that limits losses if the market moves unfavourably.
- Used by businesses to protect input/output prices (e.g., airlines hedging fuel costs).
- Helps portfolio managers reduce downside risk.
- Often involves futures or options contracts.
Example Users:
- Tata Motors hedging aluminium prices using commodity futures.
- Air India hedging aviation fuel price fluctuations.
- Institutional investors hedging large portfolios using Nifty options.
