In the current scenario, the growing economic uncertainty and developments call for a tool or mechanism that can be used by investors to reduce and minimise the risk exposure. Hedging is one such financial instrument that can help you do this. By taking a position in the futures market, which is equal and opposite to the one in the physical market, an investor can trade with the objective of reducing risks associated with changes in price levels.
If an investor has physical material or stock of a particular commodity, he can hedge his exposure to the physical market by taking a reverse and opposite position in the futures market. If a jeweller has an underlying stock, he can sell gold on the exchange platform to safeguard his position against a fall in prices. Hence, hedging can help protect businesses from the adverse effects of temporary price volatility in the commodity markets………………………………………..Full Article: Source