An organization holds 40% of its long-term assets in stocks and wants to hedge for...

Hedging is a risk management technique designed to offset potential adverse changes in the value of an existing exposure by establishing another position whose value is expected to move in an opposite or compensating direction. The organization does not necessarily need to sell or reduce its stock holdings to hedge the exposure. Instead, it may use financial instruments or other arrangements designed to reduce the financial effect of unfavorable market movements while retaining the underlying investment. Exiting the investment altogether would be more consistent with risk avoidance, while reducing or liquidating the portfolio changes the underlying exposure rather than specifically describing hedging. A hedge does not necessarily eliminate all risk, but it can substantially offset the financial impact of the identified market risk. Therefore, option D correctly describes the purpose of hedging.