Hedging is a financial strategy used to reduce the risk of adverse price movements in an asset. For example, if an investor owns shares of a company and fears that the stock price might drop, they can buy a put option. This option gives them the right to sell their shares at a predetermined price, protecting them from significant losses. In everyday terms, think of hedging like buying insurance for your car. Just as you pay a premium to safeguard against accidents, investors use hedging to shield their investments from unexpected market changes. This way, they can manage risks while still participating in potential gains.