Hedging is the action taken through the use of a financial instrument to minimize the loss or risk of the loss of value of an asset due to adverse asset price movements.
Who are Hedgers? -
Hedgers are market participants such as commodity producers who want to lock in selling prices of commodities they produce, or food manufacturers who want to lock in buying prices of raw materials purchased.
Market participants also include financial institutions handling financial assets and use derivative products such as futures to manage the risk of a portfolio of financial assets.
What is the difference between Physically Delivered vs Cash Settled Futures Contracts? -
Physical delivery is a term in a futures contract which requires the actual underlying asset to be “physically delivered” upon the specified delivery date, rather than being cash-settled.
Cash settled futures on the other hand allows for the net cash amount to be paid or received on the settlement date of the futures contract.
Futures exchanges may offer both types of contracts to market participants who have different purposes for trading futures contracts.
Risks and opportunities for corporates and individual investors: HEDGING -
Hedging currency exposure with the Mini U.S. Dollar Index ® futures contract is a way to manage business currency risk by taking a directional position depending on business requirements for conversions to or from the U.S. Dollar.
For example, a hedger may have expected the U.S. Dollar to weaken from 93.50 on 31st March (based on an analysis involving the overall downward trend in the market having retraced to the Fibonacci retracement level 76.8%) and may have had plans to convert U.S. Dollars to Singapore Dollars over the coming months to make payments to suppliers in Singapore Dollars. The hedger could have opened a short position using the Mini U.S. Dollar Index ® futures contract at or around 93.50 to lock in the value of the U.S. Dollars that they planned to use in the future at the time of payment to the supplier.
Figure 1. Weekly Chart U.S. Dollar Index ® , ICE Connect
Please feel free to join our ˲tradewithufos community, we provide comprehensive trading courses and trading apps. Complete course offerings: www.tradewithufos.com/courses
Disclaimer: All Content contained on the Platforms are provided for informational purposes only. You further acknowledge that nothing contained on the Platforms or made available through the Platforms constitutes investment, legal, tax or other advice, nor is it to be relied upon in making any investment or other decisions. You should seek professional advice prior to making any investment decisions.
Testimonial Disclosure: Testimonials appearing on this website may not be representative of other clients or customers and is not a guarantee of future performance or success.
This website uses cookies so that we can provide you with the best user experience possible. Cookie information is stored in your browser and performs functions such as recognizing you when you return to our website. Enabling the cookies imply you agree with our privacy policy and terms of use.
Strictly Necessary Cookies
Strictly Necessary Cookie should be enabled at all times so that we can save your preferences for cookie settings.
If you disable this cookie, we will not be able to save your preferences. This means that every time you visit this website you will need to enable or disable cookies again.
