> ## Documentation Index
> Fetch the complete documentation index at: https://docs.derivatives.ledig.io/llms.txt
> Use this file to discover all available pages before exploring further.

# How hedging works

> Follow a practical example of buying an exchange-rate right, exercising it or allowing it to expire.

Hedging means reducing a particular financial exposure. With Ledig’s options, a buyer pays for the ability to make a specified token exchange at a fixed rate before expiry. The writer commits the tokens needed to honour that exchange.

An option provides a choice. Purchasing it does not immediately exchange the full amount, and a market movement does not automatically trigger a payout.

## An illustrative purchase

Suppose a business expects to need 100,000 USDC within the next 30 days. It wants the ability to obtain that USDC using cNGN at a known rate.

The figures and pair below explain the mechanics. They are not a live quote or a statement that this market is currently available.

| Term | Example |
| - | - |
| Token the buyer may receive | USDC |
| Token the buyer must pay when exercising | cNGN |
| Amount covered | 100,000 USDC |
| Agreed rate | 1,500 cNGN per USDC |
| Time remaining | 30 days until the series’ exact expiry |
| Gross premium | 1.8% of the covered amount |
| Upfront premium payment | 1,800 USDC |
| Payment to exercise the full amount | 150,000,000 cNGN |

The buyer pays **1,800 USDC now**. The buyer receives the right to pay **150 million cNGN** and obtain **100,000 USDC** before expiry. The writer’s 100,000 USDC is already committed as collateral.

The premium is an additional cost. It is not a deposit towards the 150 million cNGN exercise payment, and it is not returned after exercise.

## If USDC becomes more expensive

Suppose the executable market rate for the same token pair rises to 1,650 cNGN per USDC. Buying 100,000 USDC at that rate would require 165 million cNGN, before other charges.

The option still allows the buyer to obtain 100,000 USDC for 150 million cNGN. Exercising therefore uses 15 million less cNGN than that alternative exchange. This is a comparison of the exercise payments only. The buyer has also paid the 1,800 USDC premium and must consider any transaction costs.

The buyer needs the full exercise payment in cNGN. The protocol exchanges the specified tokens; it does not pay the 15 million cNGN difference as a cash settlement.

## If USDC becomes cheaper

Suppose the executable market rate falls to 1,400 cNGN per USDC. An alternative exchange could supply 100,000 USDC for 140 million cNGN, before charges.

The buyer may choose that alternative and allow the option to expire. There is no obligation to use the agreed 1,500 rate. The 1,800 USDC premium remains spent.

The same applies if the business no longer needs the USDC. Leaving the option unused ends the exchange right at expiry; it does not create a premium refund.

## What the writer receives

When the option is purchased, the writer earns their share of the premium, after the protocol’s share, as a claimable amount. If the buyer exercises in full, the collateral is delivered to the buyer and the writer becomes entitled to the 150 million cNGN payment.

If the buyer never exercises, the writer can release and withdraw the unexercised collateral after expiry. Premium earnings are compensation for the writer’s commitment and exchange-rate exposure. They do not guarantee an overall profit.

## Match the hedge to the actual exposure

cNGN and USDC are specific onchain tokens. cNGN is not a naira bank balance, and holding USDC is not the same as holding dollars in a bank account. Obtaining or redeeming either token may involve separate providers, costs and restrictions.

Compare the option against an exchange you could actually execute in the same tokens and amount. A headline currency rate may not represent that price. Read [Risks](/risks) for token-value and liquidity risks, and [Exercising and expiry](/exercising-and-expiry) for the actions required to use the right.