What is an example of a scenario where a hedge might be used?

Hedging is a risk management strategy used to offset potential losses in investments. When considering the appropriate scenario for hedging, the context of seeking protection against adverse price movements becomes paramount. An investor anticipating a decline in the stock market may decide to hedge their investments by using various financial instruments such as options or futures that will increase in value if the market drops. This way, they can mitigate potential losses on their stock holdings.

The other scenarios do not effectively illustrate the concept of hedging. For instance, a company investing heavily despite expecting a recession does not demonstrate a strategy to protect against losses—rather, it shows a willingness to take on risk without safeguards. Similarly, a business aiming to expand its product line without research highlights a lack of planning and foresight, rather than a measured approach to managing risk. Finally, a borrower applying for a mortgage without reviewing rates indicates a neglect of due diligence and awareness in financial decisions, rather than any attempt to manage risk effectively. Thus, the scenario involving the investor seeking to offset potential losses clearly exemplifies the purpose and application of hedging in financial management.