What Is ‘Hedging’ and How Are Derivatives Commonly Used for It?
Hedging is a strategy to mitigate financial risk by taking an offsetting position in a related security. Derivatives, such as futures and options, are ideal for hedging.
For example, a company expecting to sell Bitcoin in the future can sell a Bitcoin futures contract today to lock in a price, protecting against a price drop.
Glossar
Offsetting Position
Mitigation ⎊ An offsetting position in cryptocurrency derivatives represents a strategic deployment of financial instruments designed to neutralize directional risk exposure, frequently employed by traders and institutions managing portfolios across spot and futures markets.
Bitcoin
Architecture ⎊ Bitcoin, within a cryptocurrency context, represents a decentralized, peer-to-peer electronic cash system predicated on cryptographic proof rather than requiring a trusted third party.
Financial Risk
Definition ⎊ Financial risk, within the context of derivatives and cryptocurrency trading, refers to the quantifiable uncertainty concerning potential financial loss or adverse deviation from expected returns.
Bitcoin Futures
Derivation ⎊ Bitcoin Futures represent standardized forward contracts obligating the holder to buy or sell Bitcoin at a predetermined price on a specified future date, functioning as a derivative instrument whose value is derived from the underlying spot price of Bitcoin.
Derivatives
Instrument ⎊ Derivatives are financial instruments whose value is intrinsically linked to, or "derived" from, an underlying asset, benchmark, or rate.