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How are derivatives used in hedging?

Curious about derivatives

How are derivatives used in hedging?

Derivatives are often used in hedging to manage or offset potential risks in an underlying asset. For example, a commodity producer may use futures contracts to lock in a price for their product before it is ready for market, thus reducing their risk of price fluctuations. Similarly, a company may use interest rate swaps to manage their exposure to changes in interest rates on their loans.

By using derivatives, an investor or company can protect themselves against unfavorable price movements or other market risks, while still allowing for the possibility of gains if the market moves in their favor. Derivatives can help to manage risk in a costeffective way and can be an important tool for investors and businesses.

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