In risk management, hedging primarily serves what purpose?

Hedging primarily serves the purpose of transferring risk from those who cannot afford losses. This risk management strategy allows entities to protect themselves against potential adverse effects of market movements or other financial uncertainties. By taking a position in a hedging instrument, such as derivatives, individuals or organizations can offset potential losses in their primary investments or operations. This effectively distributes risk among different parties, ensuring that those who are less risk-tolerant or who lack the capacity to absorb losses can mitigate their exposure.

The strategy does not aim to eliminate all potential risks entirely, as that would be impractical and often unattainable in financial operations. Instead, the focus is on managing risk exposure to a level that aligns with the risk appetite of the entity. While increasing loan growth and fostering competition are important aspects of financial services, they are not the primary objectives of hedging. Thus, the central aim of hedging as a risk management tool is to allow for risk transfer and protection against unforeseen financial losses.