How do derivatives play a role in hedging strategies?

How do derivatives play a role in hedging strategies?

Derivatives are financial instruments whose value is derived from an underlying asset. They are used in hedging to mitigate risk.

Can you give me an example of a derivative used in hedging?

Sure! A common example is a futures contract, which allows a company to lock in prices for commodities to protect against price fluctuations.

What are the risks associated with using derivatives for hedging?

While derivatives can reduce risk, they also introduce complexity and potential for significant losses if not managed properly.

How do companies decide which derivatives to use for hedging?

Companies assess their exposure to risk, market conditions, and their overall risk management strategy to choose appropriate derivatives.