Explanation:
Hedging means taking a position designed to reduce risk by offsetting potential losses. The hedge position is chosen specifically because its value should move inversely to the risk exposure.
Option A is incorrect. Buying an asset to offset a decline in the value of another asset refers to diversification.
Option B is incorrect. Holding an asset that appreciates in value to offset the decrease in the value of another asset is also a diversification method.
Option C is incorrect. Selling a loss-making asset and replacing it with a profitable one is a form of Profit/Loss strategy.
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Q.18 In risk management, the term 'hedging' is often used to describe a specific strategy aimed at protecting the value of an asset or portfolio against potential losses due to market fluctuations. Which of the following options most accurately captures the essence of this concept?
A
Buying an asset to offset a decline in value of another asset.
B
Holding an asset that appreciates in value to offset the decrease in the value of another asset.
C
Selling a loss-making asset and replacing it with a profitable one.
D
Holding an offsetting position in an asset or portfolio whose value we expect to move in the opposite direction with market changes.
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