What is the primary goal of hedging?

The primary goal of hedging is to offset potential losses in investments. Hedging strategies are designed to protect an individual's or a company's financial position by using various financial instruments to reduce the risk of adverse price movements in an asset. By implementing a hedge, investors can safeguard their portfolios from volatility or downturns in the market, effectively minimizing potential losses that could arise from unforeseen events or shifts in market conditions.

For instance, an investor holding a stock that they believe may decline in value might purchase a put option, which gives them the right to sell the stock at a predetermined price. This strategy helps protect against a significant drop in the stock’s price, ensuring that any losses are mitigated.

The other options, while related to financial management, reflect objectives that do not align with the core concept of hedging. Increasing investment returns focuses on gaining more profit rather than protecting against loss, maximizing market share pertains to business growth strategies rather than risk management, and reducing operational costs addresses efficiency rather than investment risk. Thus, the essence of hedging lies in its function as a risk management tool to provide a safety net against potential financial setbacks.