What impact does hedging have on investment risk?

Hedging involves taking a position in one market to offset and reduce the risk of losses in another investment. This strategy does not remove all risks, but instead lessens the potential financial impact of adverse price movements. By using financial instruments such as options, futures, or swaps, investors can protect themselves against market volatility or specific risks associated with their investments. Therefore, the correct assertion highlights that hedging mitigates potential losses in certain investment positions, allowing investors to navigate market fluctuations with greater resilience and stability.

The other choices do not accurately reflect the nature of hedging. While some might suggest that hedging could guarantee high returns or eliminate risks entirely, it is essential to recognize that no investment strategy can provide such absolutes. Additionally, instead of increasing overall portfolio exposure, hedging typically seeks to reduce it by balancing risk across different assets or positions.