What is the primary goal of using "hedging" in commodities trading?

The primary goal of using hedging in commodities trading is to protect against adverse price movements. Hedging is a risk management strategy employed to offset potential losses in investments by taking an opposite position in a related asset. For example, if a trader anticipates that the prices of a commodity they own may decrease, they can enter into a hedging contract, such as a futures contract, to lock in a price and mitigate the risk of loss.

By effectively managing price volatility, hedging allows traders and producers to stabilize their revenues and predict costs more accurately. This is particularly important in the commodities market, where prices can fluctuate significantly due to factors such as supply and demand, geopolitical events, and seasonal changes.

In contrast, increasing overall risk exposure would negate the purpose of hedging, as would seeking maximum profitability without considering potential losses. While reducing transaction costs can be a benefit of certain hedging strategies, it is not the primary goal. The focus of hedging remains on protecting against unfavorable price shifts, ensuring that businesses and investors are better insulated against the unpredictability of the market.