Market participants seek to hedge against risks from "summary" of Business Cycles and Equilibrium by Fischer Black
Market participants are constantly exposed to various risks in the financial markets. These risks can arise from fluctuations in interest rates, exchange rates, commodity prices, or other factors beyond their control. To protect themselves against these risks, market participants often seek to hedge their positions using various financial instruments such as options, futures, or swaps.
Hedging involves taking offsetting positions in the financial markets to reduce the overall risk exposure of a portfolio. By hedging, market participants can protect themselves against adverse price movements and minimize potential losses. For example, a company that is heavily reliant on a particular commodity may choose to hedge its exposure by entering into a futures contract to lock in a favorable price.
In addition to protecting aga...
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