While hedging can protect against unfavorable price movements, it is not without its risks. Some of the potential downsides include:
Basis Risk: The risk that the hedge may not perfectly correlate with the underlying exposure, leading to ineffective risk management. Opportunity Cost: By locking in prices, hedgers might miss out on favorable price movements. Complexity and Costs: Hedging strategies can be complex and costly to implement, requiring expertise and continuous monitoring.