Purpose Of Hedging

This problem practices a core risk management concept that comes up often in capital markets and hedge fund interviews. Candidates should be able to explain how hedging is used to reduce exposure to adverse market moves, how derivative instruments can offset losses in a position, and why investors may accept less upside in return for more protection. Interviewers ask this because they want to see whether you understand not just return generation, but also how professionals manage risk and think about the trade off between protection and participation.