Answer:
Hedging is a method of loss control used in financial markets to mitigate or offset the impact of adverse price movements. Option (a) is true.
Step-by-step explanation:
Hedging is indeed a method of loss control, particularly in the context of financial markets and risk management.
Risk Management:
Hedging is a strategy employed to mitigate or offset the risk of adverse price movements in assets.
It is commonly used in financial markets to protect against potential losses.
Protection Against Price Fluctuations:
In financial terms, hedging involves taking a position or entering into a financial contract to reduce the impact of adverse price movements.
This can be done to protect against losses caused by fluctuations in the prices of assets, commodities, currencies, or other financial instruments.
Common Hedging Instruments:
Various financial instruments are used for hedging, such as futures contracts, options, swaps, and forward contracts.
These instruments allow individuals, companies, or investors to offset potential losses by creating positions that move in the opposite direction to their existing exposures.
Example:
For instance, a company that relies on importing raw materials from another country may use hedging to protect itself from currency exchange rate fluctuations.
By entering into a currency futures contract, the company can lock in a specific exchange rate, ensuring that the cost of the imported materials remains relatively stable.
Loss Control Objective:
The primary objective of hedging is loss control.
It is not a profit-maximizing strategy but rather a risk management approach that aims to limit or eliminate the impact of adverse market movements on a portfolio or specific financial position.
Applicability Beyond Finance:
While the term "hedging" is commonly associated with finance, the concept of risk management and loss control extends to various other fields.
For example, businesses may hedge against operational risks, and farmers may use hedging strategies to manage the uncertainty of crop prices.
Thus, option (a) is true.