Which of the following describes a financial hedging strategy?

A financial hedging strategy is primarily aimed at reducing systematic risk, which is the risk inherent to the entire market or a market segment. By using various financial instruments, such as derivatives (options, futures, or swaps), investors can hedge against potential losses resulting from market movements. This strategy allows investors to protect their portfolios from adverse price movements, particularly in volatile markets, thereby managing risk effectively.

In the context of other options, increasing portfolio risk does not align with the purpose of hedging. While strategies could involve changes in asset allocation, hedging itself does not solely focus on decreasing allocations. Additionally, while some hedging strategies do aim to mitigate the impact of market fluctuations, they do not entirely bypass them; the goal is to manage and offset risks, not to eliminate market exposure altogether. Therefore, the emphasis on reducing systematic risk makes the second option the most accurate descriptor of a financial hedging strategy.