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Finally, market makers also employ various *risk management* techniques. Since they're always exposed to market risk (the risk of losses from price fluctuations), they need to protect themselves. This might involve hedging their positions, using derivatives, or setting strict trading limits. Hedging involves taking offsetting positions to reduce the exposure to market volatility. Derivatives, such as options and futures, can be used to manage risk and speculate on future price movements. Trading limits restrict the size of positions they can take, limiting potential losses. Risk management is, therefore, a crucial element of their operations, ensuring that they can weather market storms and stay profitable over the long term.
