Trade hedgers aim to stabilize commodity prices by positioning themselves in the market. This strategy helps keep production costs within budget and improves potential for net profit. Companies that rely on petroleum products are common examples of business hedges.
Trade hedgers are corporations that seek to ensure the stability of a given product by positioning themselves in the commodity market. The exact nature of the stake or position will vary, depending on the type of influence the corporation wishes to exert over the product. In general, the objective of trade hedging is to create a situation in which the price of the commodity remains at a level considered desirable by the corporation.
One of the main motivating factors for employing this type of strategy is the use of merchandise in production. The commercial hedge agent will often make use of the merchandise in the manufacture of goods and services sold by the corporation. From this perspective, it should come as no surprise that the hedger wants to keep the price of the product at a level that is affordable to the corporation. This action can help keep the company’s production costs within budget and thus improve the potential for net profit.
When a corporation chooses to employ a hedging strategy, the business hedge becomes an investor and consumer. This can help the final result. First, by securing a futures option on the commodity, the corporation can claim valuable production materials at a desirable price. Second, the company can benefit from the stable performance and trading of the product on the open market. At best, this approach puts the commercial hedger in a win-win situation that transfers most of the market risk to speculative investors who also participate in the market.
Many different types of companies function as hedges. In today’s market, one of the most common examples of a business hedge would be a business that relies on petroleum products to operate. The hedger would buy futures while the price per barrel of crude oil is relatively low, thus protecting against the market risk involved with high prices over the long term.
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