What is hedging? What purpose does it serve?

Hedging Hedging is a process of risk management under which the risks emanating from a transaction are covered or mitigated. This refers to a risk management strategy used in limiting or offsetting probability of loss from fluctuations in the prices of commodities, currencies, or securities. In effect, hedging is a transfer of risk without buying insurance policies. (a risk management strategy employed to offset losses in investments by taking an opposite position in related asset. It obviously results in potential profits. Hedging strategies typically involve derivatives such as options and futures contracts). The best example to hedge the foreign currency exposure is forward Contract.