InvestorQ : What is hedging of commodity prices and what role do hedgers play in the market?
manisha Kolvenkar made post

What is hedging of commodity prices and what role do hedgers play in the market?

Answer
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krithika Saxena answered.
2 years ago


Hedgers are those participants who have an underlying exposure to a particularly commodity. Let us assume that you have a large order of silver that you need to deliver to a jeweller after 3 months. The only problem is that the deal will be done at the prevailing price on that date. That exposes you to the price risk over the next 3 months. You are quite satisfied with the price of silver today but you are apprehensive that 3 months down the line the price of silver may be lower. You can hedge by selling 3-month silver futures short. By doing so you are locking in your position at a price that is prima facie attractive to you. You are therefore indifferent to the price movement of silver over the next 3 months. Of course, you will incur a notional loss if the price of silver goes up but that is the job of a speculator. As a hedger, your job is to protect your downside risk and that is something you have managed effectively. Hedgers are traders with genuine exposure to the underlying market and hence lend stability and credibility to the commodity markets. In short, hedgers, speculators, traders and arbitrageurs actually are the four participants that form the four pillars of the commodity markets. It is the joint actions of these four participants that determines the direction and robustness of the commodity markets.