Hedging is primarily used to mitigate what?

Hedging is a strategic approach utilized primarily to mitigate potential losses in investments. The essence of hedging lies in its ability to reduce the risk exposure associated with price movements in assets. By implementing various techniques, such as options, futures contracts, or other derivatives, an investor can create a safeguard against adverse price movements that could negatively impact their investment portfolio.

For example, if an investor holds a stock that they fear may decrease in value, they could purchase a put option, which would increase in value if the stock falls, thus offsetting some of the losses incurred from the stock's decline. This risk management strategy is essential in unpredictable markets where price swings can lead to significant losses, providing a form of insurance for the investor.

The other options, while related to various aspects of investing, do not directly capture the primary purpose of hedging. Hedging does not focus on the overall investment amount or the transaction costs involved in trading. Additionally, while it may help bring down volatility in a portfolio, its principal aim is to protect against losses rather than simply address market fluctuations.