In the context of financial risk management, what is a "hedge"?

In financial risk management, a hedge refers specifically to a financial instrument or strategy employed to mitigate or offset adverse price movements in an asset. By reducing exposure to specific risks, a hedge can protect an investment’s value or reduce potential losses. This is typically achieved through various instruments such as options, futures, or swaps, which can provide a counterbalance to the risk inherent in the primary investment.

For instance, if an investor holds a position in a stock that is susceptible to market downturns, they might purchase a put option on that stock. The put option provides the right to sell the stock at a predetermined price, effectively protecting the investor from losses should the stock’s price fall below that level.

The other options present concepts that don't align with the established definition of hedging. Specifically, investments aimed at increasing potential gains represent a speculative position rather than a protective strategy like hedging. High-risk investments and methods for raising capital do not directly relate to the premise of mitigating financial risk.