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How Does Hedging with Derivatives Differ from Simple Diversification?

Hedging offsets a specific risk with an opposite derivative position; diversification reduces unsystematic risk by spreading investments.
Greeks.Live24.11.25

How Does Hedging with Derivatives Differ from Simple Diversification?

Hedging with derivatives is a risk management strategy that specifically offsets a known, undesirable risk exposure by taking an opposite position in a related financial instrument. Diversification, conversely, is a strategy to reduce unsystematic risk by spreading investments across various uncorrelated assets.

Hedging is more targeted; diversification is broader.

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