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Reasons
for Hedging
Participating
in hedging has reasons that are connected with price risk.
Typically, traders take part in hedging so they can more effectively
plan on set
pricing (often employing the hedge
ratio).Considering
of course, gold or silver futures for instance as a hedge against inflation
and falling currencies.
Farmers, growers and producers alike near the source hedge to get a
lock on pricing at some appointed time. Often they buy futures basically
in order to
protect against price drops (see hedging).
Producers, manufacturers and large consumers are commonly in the practice
of hedging but rather to get a better handle on their cash flow or finished
product/service costs. Surely in commodities that are known to be volatile
in nature, where prices need a stabilization factor. Where precious
metals are used as raw materials, for example.
Trucking companies, the airlines and transportation companies all hedge to lock
in lower prices. Electricity generation, in its used of natural gas
also provides ample reason for hedging.
Larger food companies needing the ingredients of grains and wheat flour
for breads, cereals and baked goods (not to mention coffee and cocoa)
and hedge for
price protection. When successful it becomes an integral part of
delivering their product to consumers.
Some companies even hedge so that consumers may not be so hard pressed
in the event of price climbs, perhaps seen as unreasonable by
consumers.
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