The use of commodity hedging strategies to manage the price risk

Commodity traders are profiting mainly in two different ways; speculation and hedging. The latter – a risk management strategy, which is used to protect your investment against losses and protect profits. Thus, the former with 39 & # is a more aggressive strategy, purely due profits. Although both can be used at the same time strategies for traders is very important to understand how hedging works and why it is needed. Ideally goods hedging strategy – one of the basic tips to profit from the sale of goods. Here is a brief outline of how to use this simple strategy to maximize profits.

What is a trader of hedge funds?

Trader hedge fund – a natural person or a company that is involved in business related to a specific product. Preferably, the trader hedge fund can be a producer of the product, but rather a company interested in buying goods in the future. Hezhavanne allows each participant to limit their exposure to the commodity markets.

Why traders to hedge?

It is impossible to predict in which direction the prices of goods taken with 100% accuracy. In addition to price direction, traders should also be aware of the specific terms of such changes. Instead of stress to get these two factors properly, traders may choose to profit by using hedging strategies.

How does a hedge?

Physical commodities traders are buying or selling in the cash market. Meanwhile, the contracts relating to the delivery of these products in the future, used in the market f & # 39; yuchersav. Despite the fact that the market for cash and F & # 39; yuchersnyya prices are closely related, they do not move the same way. This is the reason why the term "base" is used during the transaction. Ideally (base = value of cash – the price f & # 39; yuchersav).

Go short or long?

Investors and traders can make two choices; go short or long. Quick design provides for loan contract in the broker and its sale before buying it back at a lower price. Conversely, dragging provides today the purchase of goods with the expectation that the sale price will make a profit in the next stage.

The decision to go for a long time with their hedging strategies weakens the foundation. This is due to the fact that the cash cost is reduced in the same way as f & # 39; yuchersny contract. Thus, shortyng can be useful if the substrate is increased. Increase in the cost of cash is always relative f & # 39; yuchersnaga contract. Remember that the base can move in the opposite direction to the price level. But the main thing – the absolute difference between the two.

Potential hedge risks

Since producers hedged by physical commodities, are not considered risky, based on the short term. However, a trader can hedge lose all their potential savings if the forecasts wrong price movement.

It is worth adding hedges to your trading plan?

Hedging & # 39 is one of the greatest tools for managing the risks associated with commodity trade f & # 39; yuchersami. If possible, the purpose of hedging should be focused on the transfer of price risk and setting prices that will pay or receive a certain range. Reducing the impact of surprises allows traders to confidently plan their activities.