Category: Commodity Price

Hedging is based on the principle that cash market prices and futures market prices tend to move up and down together. This movement is not necessarily identical, but it usually is close enough that it is possible to lessen the risk of a loss in the cash market by taking an opposite position in the futures market.

Taking opposite positions allows losses in one market to be offset by gains in the other. In this manner, the hedger is able to establish a price level for a cash market transaction that may not actually take place for several months.

The Short Hedge

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