What does "hedging" involve?

Hedging involves making an investment designed to reduce the risk of adverse price movements in an asset. This risk management strategy seeks to offset potential losses in one investment by taking an opposite position in a related asset. For instance, a company expecting to receive a payment in a foreign currency might hedge against potential currency fluctuations by entering into a currency swap. This way, even if the currency moves unfavorably, the hedging strategy provides a level of protection against loss.

The other options relate to different investment strategies. Investing in a diversified portfolio aims to spread risk across various assets rather than focusing on a single investment, while speculating on market trends involves taking positions based on expected future movements, which inherently carries higher risk. Buying long-term bonds is a specific investment strategy rather than a risk management tool. Thus, the essence of hedging is centered on risk reduction through specific investment actions.