Page 255 - A Canuck's Guide to Financial Literacy 2020

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Hedgers

Hedgers are individuals whose goal is not to make a profit but rather minimize their risk in
changes of commodity prices, exchange rates, interest rates, etc. Hedgers often purchase
futures contracts manage risks.

Wheat Hedger Example

Jim, a wheat farmer, is concerned that the wheat prices will drop towards the end of
summer. He wants to make sure that he locks in the price of wheat today and does so by
selling a wheat futures contract. When he harvests his wheat towards fall, the price of wheat
would've gone down by at least $30. However, he has successfully offset this loss by a
trading gain in the futures market. If the price of wheat increases in fall, then Jim would
have had a trading loss on his futures contract but a gain when selling the price of wheat.

A wheat farmer is concerned that the price of wheat will fall over the summer months. He
successfully hedges the reduction in price by buying a futures contract.

Types of Hedgers

• Buy-Side Hedgers

These types of hedgers work in the buy-side of the financial markets. They buy and
invest in a number of securities for the purpose of fund management. These types of
hedgers would be concerned about the rising prices of the underlying commodity