Financial theory does not provide a comprehensive framework for explaining risk management in the fluctuating financial environment in which the business operates. Thus, business leaders consider risk management as one of their top priorities. One strategy to reduce risk is to use hedging. This article will discuss the advantages and disadvantages of hedging risk using financial derivatives. Coverage depends on various motivations. For example, if a manager intends to minimize corporate tax, he will cover his taxable profit. Stulz (1984) and Smith and Stulz (1985) indicate that progressive tax rates and, therefore, convex tax schedules lead to an increase in the expected tax liability of the firm with the change in taxable income, which indicates that hedging increases the value of the firm by decreasing the present value of future tax liabilities. . If the primary concern of corporate managers is to reduce the costs of financial distress and the manager can accurately communicate the firm's probability of default, the manager's strategy will focus on the market value of debt and equity clean. Risk hedging has two sides, such as upside and downside. . The main benefit of the cover is to help reduce the risk of financial difficulties that the company might face, and it helps the company insure itself against negative events that could lead to financial difficulties, such as: inflation, exchange rate volatility and interest rate variations. Additionally, it could protect the company from distress to the extent that the reduction in distress costs exceeds the cost of coverage, which will increase the value of the company. The second benefit would be more money generated by the company hedging itself; hedging can actually reduce firms' debt-to-value ratio and increase their level of debt capacity (Kale and Noe, 1990). A firm paper......middle of paper......sk is also preferable. (Tufano, 1996) stated that most companies hedge against gold price risk in order to smooth the income they will receive from production. Additionally, some companies use commodity price risk to protect against commodity prices in their inputs. In this case, Hershey's can use cocoa futures to reduce cost uncertainty in the future. In conclusion, hedging risk with financial derivatives can provide a range of benefits such as a lower probability of experiencing financial difficulties, a lower value of the debt-to-equity ratio and benefit from a tax benefit. It can be concluded that the company should hedge risks using financial derivative products because there is ample evidence to show that the company that uses this strategy is more successful than those that do not. However, because different types of businesses face different risks, they do not necessarily have to use the same hedging strategy..