Answer:
Hedge Risks
Explanation:
Derivatives refer to securities whose value is derived on the basis of the value of the underlying assets. For example, commodity derivatives, financial derivatives, futures, options etc.
Hedging refers to a mechanism by which a probable future loss can be avoided or reduced.
Forward contracts are derivatives wherein a party agrees to buy or sell an asset at a future date at a price fixed today.
For example, an exporter in London will receive export amount in 6 months time. After 6 months, the sterling pound (domestic currency) might appreciate which would result into a loss to exporter upon conversion.Thus, to reduce his loss, he may enter into a forward contract whereby he agrees to sell USD after 6 months at an exchange rate fixed as on today.
This is the concept of hedging.
There are risk in business. Although derivatives can be used as speculative instruments, businesses most often use them to hedge risks.
It is a strategy for lowering exposure to investment risk. such as the use of derivatives as speculative instruments.
Learn more about hedge risks from
https://brainly.com/question/13905761
