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Managing Commodity Price Risk by Lutz Kaufmann, Barbara Gaudenzi, Janet L. Hartley, George A. Zsidisin

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CHAPTER 9

Further Insights on Financial Hedging Instruments

Ugo Montagnini

Corporate Sales–Customer Desk Corporate, MPS CAPITAL SERVICES

Background

A hedge is a financial investment used to reduce the risk of unfavorable price movements in an asset. A hedge typically means taking an offsetting position in a related security, such as a futures contract when you will be buying or selling an asset, such as a commodity, in the future. For example, a farmer who will sell wheat in the future can hedge by buying a futures contract now then selling that contract at a future date. Financial tools that can be used are derivatives, which typically move in parallel with the underlying asset: they include options, swaps, futures and forward contracts. These ...

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