Say you run a small airline. Fuel is your biggest expense, and you have very little control over what it costs. A war disrupts oil supplies, a refinery shuts down, or the dollar takes another hit. Any of these could push jet fuel prices up by 30% in a single quarter. The problem is that you have already sold the tickets. Your revenue is largely set, but your costs can still change. And if fuel prices rise sharply enough, the difference comes straight out of your margins. You could take your chances with the market, and hope prices come down. Or you could agree on a price today for fuel you will need six months from now.

This is what the futures market allows businesses to do, and when a company uses a financial contract to protect itself against a risk it already faces, that is hedging . The goal is to make future costs more predictable and protect the business from price movements that could eat into its margins. But locking in a price is only one way to manage that risk.…