Risk coverage. Exchange options
The instruments most liable to be defined as hedging mechanisms are financial options.
Through options, agents pay a premium to acquire the right to buy or sell an asset to be delivered in the future at a predefined price.
The buyer is the only person who decides whether to exercise the option right.
The seller takes on the risk transferred by the buyer in exchange for a premium. If the adverse scenario does not occur, then the buyer only loses the premium and the seller earns high profit for covering a risk which has not materialised.
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