Hedging using commodity futures, Financial Management

Assignment Help:

Hedging Using Commodity Futures

Producers of agricultural commodities are faced with price risk and production risk over a period of time and within a marketing year. In case of agricultural commodities, price risk can occur for a number of reasons like drought, floods, uncertain rainfall, natural calamities, near record production, increase in demand, decrease in international prices, etc. One way of reducing this risk is through the commodity futures exchange markets. Agricultural producers can use commodity futures to hedge the potential costs of commodity price volatility.

Hedging in the futures market involves a two-step process. Depending upon the hedger's cash market position, he will either buy or sell futures initially. For example, a firm which owns or plans to purchase or produce a cash commodity will sell futures to hedge this cash position. A long hedge involves a firm purchasing futures to protect itself against a price increase in a commodity prior to purchasing it in either the spot or forward market. In the second stage, once the cash market transaction materializes, the futures position is no longer required and hence the hedger will close his futures position, i.e., if he has gone long on a contract, he will sell it. Alternatively, if he has initially sold a futures contract, he will buy one. It should be noted that both the opening and closing positions must be for the same commodity, same number of contracts and delivery month.

 


Related Discussions:- Hedging using commodity futures

Concept and measurement of the cost of capital, Concept and measurement of ...

Concept and measurement of the cost of capital The evaluation of the worth of a long-term project suggests a certain norm or standard against which benefits are to be judged. R

What are the corporate bonds, What are the Corporate Bonds? Corporate ...

What are the Corporate Bonds? Corporate bonds are issued by huge corporations while they require long-term financing. They generally make interest payments double a year (sem

Tax-backed debt, An analyst should first examine the issuers ...

An analyst should first examine the issuers debt structure in order to analyze the tax-backed debts. The debt burden consists of respective direct a

Assignment, Discuss the applicability ofan operating cycle in a poultry bus...

Discuss the applicability ofan operating cycle in a poultry business(consider broilers)

State the types of integration, State the Types of integration ...

State the Types of integration Types of integration Horizontal Target company has same operations, and is in the same industry

Credit enhancement of asset-backed security, Credit enhancement of an...

Credit enhancement of an asset-backed security implies the existence of support for one or more of the bondholders in the structure. Credit enhancement levels var

Portfolio management, Portfolio Management: Project Portfolio Manageme...

Portfolio Management: Project Portfolio Management (PPM) is the centralized management of processes, technologies and methods used by project management offices (PMOs) and pro

ACCRUAL INCOME VERSU CASH FLOW, Thomas book sales, inc. supplies texbooks t...

Thomas book sales, inc. supplies texbooks to college and university bookstore. The books are shipped with a proviso that they must be paid for within 30 days but can be returned f

OPERATING CYCLE, #discuss the applicability of operating cycle to poultry b...

#discuss the applicability of operating cycle to poultry business.

Define accumulated depreciation, What is accumulated depreciation? Depr...

What is accumulated depreciation? Depreciation is the allocation of an initial cost over time of asset. Whereas the term accumulated depreciation is the total of all the deprec

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd