Hedge Grain Risk Flashcards
What is hedging
The management of the price risks inherent in tthe purchase or sale or commodities
Who transfers what to who in hedging?
Price risk is transferred from those seeking to reduce it to others willing to assume it in hopes of making a profit
Who are grain Hedgers?
Grain Hedgers are those who need protection against declining prices such as farmers, merchandisers, and grain elevators.
And those who need protection from rising prices like food processors feed manufacturiers and importers
Who need protection from rising prices?
Food processors, importers and feed manufacturiers
Who need protection from declining prices?
Farmers, merchandisers, grain elevators
What is hedging essentially
Taking a position in the futures or options market that is opposite your current position in the cash market
Why does convergence help / enable hedging?
Since cash and futures prices move up and down together, any gains or losses in the cash market will be counterbalanced by those in the futures market
A farmer who has crop still growing in the filed has a….
Long cash position
How would a farmer with a long cash position hedge in order to lock in a selling price?
To lock in a selling price he would take a short position in the futures market by selling by selling futures contracts now and buying them back later when it’s time to sell in the cash market
What position do livestock feeders grain importers and food processors have?
A short cash position as they expect to acquire grain in the future.
How would those with a short cash position lock in a purchase price?
They would take a long position in the futures market by buying futures contracts now and selling them later when they’re ready to purchase grain
How to determine whether to buy or sell futures?
If your future action includes selling in the cash market, an appropriate hedge today is to sell futures
If your future action involves buying in the cash market…
You want to buy futures today as a hedge
How do speculators facilitate hedging in the futures market?
They take the opposite side of most commercial trades.
What attracts speculators to a market?
The oppurtunity to realize a profit if they correctly anticipate the direction and timing of price changes. They provide market liquidity
