Hedge is a risk-management strategy used to protect against the chance of adverse movements in assets or investments. It involves taking offsetting positions in derivatives, such as futures and options, that have an inverse relationship with the assets being hedged. For example, an investor may purchase a stock option contract with a strike price of $25, which gives her the right to buy 100 shares at $25. The investor will then attempt to sell the contract at a price above the strike price to provide a profit. This will help to offset any losses if the underlying stock price drops below the strike price.

In addition to protecting against market risk, hedge strategies may be used to limit the impact of changes in interest rates or volatility. In this case, an investor might purchase a put option on a futures contract to lock in a specific sale price for a future period of time. By doing so, the investor can protect themselves from large price swings due to factors such as macroeconomic events or news reports.

Hedging is not only applicable to individual investors, but can be advantageous for companies as well. Corporate hedging strategies can help manage risk for firms exposed to foreign exchange rate fluctuations or commodities prices changes. By taking advantage of futures and options or currency hedging, these firms can help to increase profit margins, mitigate volatility and limit their downside risk.

Overall, hedge strategies are used to manage the risk of financial instability and mitigate volatility. By taking offsetting positions in assets, investors can protect themselves against the potential downside of their investments. For companies, hedging can help reduce the impact of market fluctuations on their earnings and help to ensure a steady flow of revenue.