Final answer:
A hedging derivative is a financial contract that firms use to protect against risks associated with changes in market conditions, effectively functioning as an insurance policy.
Step-by-step explanation:
A derivative contract designed to mitigate the risk of economic loss arising from changes in the value of the underlying asset or obligation is called a hedging derivative. These derivatives serve as a form of financial insurance, providing firms with protection against various types of risk, such as exchange rate fluctuations, interest rate changes, or the default of loans. Companies often use financial institutions or brokerage companies to facilitate hedging activities, either for a fee or by creating a spread in the exchange rate. In simple terms, hedging acts like an insurance policy, mitigating potential losses from unfavorable movements in currency values or other investment risks.