What type of risk does hedging aim to reduce?

Hedging primarily aims to reduce potential loss risk. This strategy involves taking an offsetting position in a related asset, thereby providing a form of insurance against price fluctuations that could lead to financial losses. For instance, if a producer anticipates a decline in the price of a commodity they are selling, they may enter into a futures contract to lock in current pricing, which protects against potential losses when the market price decreases.

By utilizing various financial instruments such as options, futures, or swaps, hedging allows businesses and investors to mitigate risks associated with price volatility in the markets. This focus on safeguarding against financial setbacks is central to the concept of risk management in the commodities market.