HEDGER

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Hedger is an individual or company owning or planning to own a cash commodity and concerned that the cost of the commodity may change before either buying (or selling) it in the cash market. A hedger achieves protection against changing cash prices by purchasing (selling) futures contracts of the same or similar commodity and later offsetting that position by selling (purchasing) futures contracts of the same quantity and type as the initial transaction or undergoing delivery if the hedge date is the delivery date.

 

Similar methods can be deployed with options positions. If an asset is held and a price fall is feared, then put options may be purchased. If it is intended to purchase the asset or commodity then a call option may be bought. Better protection is usually obtained here by selling the options back, thus realizing time value, rather than exercising them.