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Leesburg, Ohio | A hedge is the transferring of a risk that you now have, to someone else. As corn producers, we own corn (we are "long" corn.) That means we have price risk. If we want to eliminate price risk, we can use a "hedge" to eliminate that risk by transferring the risk away to someone else that wants that risk. We can do that by SELLING a futures contract for corn on the Chicago Board of Trade (going Short corn). If we were a USER of corn. we would hedge by BUYING a futures contract (going LONG).
A hegde is the opposite of speculating. As corn producers, we are speculating that the price will go up anytime we have corn in the ground or in the bin that is not priced. We can set the price by hedging, as described above, or by selling cash forward, as in contracting with an elevator for delivery. The hedge leaves the BASIS (the difference between the futures price and the delivery price) open or not set. Forward contracting with the elevator sets booth the futures price and the basis. An HTA with the local elevator would accomplish the same as a hedge (basis would be open). | |
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Define what Hedge means???
