Hedging means taking a position specifically to reduce risk from an existing exposure — for example, a company that needs to buy raw materials in three months might use a Futures contract to lock in today’s price, protecting itself from a possible future price increase.
Hedging vs Speculation
Hedging aims to reduce risk; speculation aims to profit from taking on risk deliberately. Both are legitimate uses of derivatives, and we cover the distinction in full detail in the next Academy lesson.
Related Reading
See the introductory explanation in What Are Derivatives? Futures and Options Explained Simply.