How is hedging used in investment strategies?

Hedging is primarily a risk management strategy used in investment to offset potential losses by taking an opposing position in a related asset. This approach allows investors to reduce the impact of adverse market movements on their investments. For instance, if an investor holds a stock and is concerned about a decrease in its value, they might purchase options or futures contracts that would increase in value if the stock price drops. This effectively mitigates the risk associated with the existing position, providing a form of insurance against potential losses.

The main objective of hedging is to protect investments rather than to seek additional profits. While it can indirectly lead to a more stable performance, the primary purpose is to reduce risk exposure. Understanding how to implement hedging strategies is crucial for investors aiming to safeguard their portfolios in uncertain or volatile market conditions. This fundamental aspect of risk management underscores the reasoning behind the selection of this choice as the correct answer.