Which strategy is typically used to manage risk?

Hedging is a strategy employed to mitigate risk by taking an offsetting position in a related asset or financial instrument. The fundamental concept behind hedging is to reduce exposure to adverse price movements. For instance, a trader might use derivatives, such as options or futures contracts, to protect against potential losses on an underlying asset. This allows investors or businesses to stabilize their financial outcomes and create a safety net against volatility in the market.

In the context of managing risk, hedging is indispensable, as it provides a proactive approach to safeguarding investments. It enables individuals and companies to lock in profits and minimize losses, thereby ensuring more predictable financial performance.

Other strategies, such as speculation, liquidation, and leverage, carry different objectives and outcomes. Speculation involves taking on risk in the hopes of profiting from price movements, which does not align with risk management. Liquidation refers to the process of selling off assets, often under duress, to realize cash or minimize losses, but it does not inherently address ongoing risk management strategies. Leverage amplifies potential returns but also increases exposure to risk, making it a strategy that can heighten risk rather than manage it. Hence, hedging stands out as the appropriate answer for managing risk effectively.