What is a hedge in finance?

In finance, a hedge is defined as an investment strategy employed to reduce the risk of adverse price movements in an asset. This is achieved by taking an offsetting position in a related security or asset. The primary intent of hedging is to protect against potential losses that might arise from fluctuations in market prices. For example, a company that exports goods may hedge against the risk of currency fluctuations by using financial instruments such as options or forward contracts, thus stabilizing their expected revenue and costs.

This understanding highlights the distinct role of hedging as a risk management tool rather than a mechanism for maximizing returns or focusing solely on the growth of investments. Maximizing returns or targeting growth stocks tends to involve higher levels of risk, while hedging inherently seeks to protect against that risk. Additionally, while investing for long-term profit without risk may sound appealing, it is generally understood that all investments carry some form of risk, and therefore such an investment strategy is unrealistic. Thus, option B accurately captures the essence of what a hedge is meant to accomplish in the realm of finance.