AREC 384 more hedging

  1. who would want to participate in a short hedge and why?
    • selling hedge
    • farmer or processor who has extra space and wants to make money from storage feeds and shift risk
  2. storage hedge
    take this strategy if you believe the basis will get narrow as you get closer to the futures contract date for a storable commodity
  3. purpose of a storage hedge
    • shift risk
    • earn income from storage
  4. risk of a storage hedge
    no guarantee that changes in basis will be sufficient to cover storage costs
  5. preharvest hedge
    • short hedge that allows farmers to lock in a profitable selling price
    • make an educated guess that the price will probably be around a certain futures price for a certain maturity date
    • then you make your planting decision
  6. purpose of a pre-harvest hedge
    shift risk and lock in high price
  7. risk of a preharvest hedge
    requires accurate prediction of local harvest basis, which differs from location to location
  8. cross hedge
    • when one offsets in the futures market for a product that is highly correlated with the product of interest 
    • prices move together or exactly opposite - clear relationship
Card Set
AREC 384 more hedging
lecture 13