Hedging

In the maritime context, hedging refers to a risk management strategy used by companies involved in international trade and shipping to protect themselves against potential losses due to fluctuations in fuel prices, currency exchange rates, and freight rates. This is achieved by entering into a contract (a hedge) that will give them the right or obligation to buy or sell a commodity, currency, or freight space at a predetermined price at a future date. The main purpose of hedging is to stabilize the cash flows and profits of the company by reducing the uncertainty associated with volatile market conditions. For instance, a shipping company might enter into a fuel hedging contract to protect itself against potential increases in fuel prices. If the fuel prices increase in the future, the company can still buy fuel at the price specified in the hedging contract, thereby avoiding the additional cost. Similarly, a company that exports goods might use currency hedging to protect itself against potential losses due to changes in the exchange rate.