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commodity markets
S.Venkataraghavan
Vice President –Research
www.altostrade.com
Disclaimer
! The views expressed in this presentation are personal. They are not a
solicitation to buy or sell instruments.
Proprietary Positions No
Family and Friends Yes
Clients Yes
Other Conflicts Maybe
Dedicated to the Greatest Cartoonist of
all times R.K.Lakshman
In Spain a very interesting sport of valor is played the MATADOR here
I try to draw an analogy from that sport to the recent moves in financial markets.
Soybean,Rapeseed oil
• Hedging Defined When two risks offset each other, one is said to be a
hedge for the other. A hedged position has less risk than its separate
components.
• A Commodity Hedging Example A farmer who has wheat in the ground
risks that the price of wheat will fall before the July harvest.
• A baker who must buy flour in July risks that the price of wheat will rise
before July.
• A natural hedge appears possible because these two risks are
complementary.
• The Hedge If the baker buys a wheat futures contract from the farmer,
both will reduce their net risk exposure.
• Although the futures contract by itself may be very risky, when used in
these hedges, it reduces overall risk.
• The contract need not be delivered.
• The Farmer’s Hedge :The farmer hedges her long position
(wheat in the ground) with a short position in wheat futures.
If wheat prices fall, the farmer loses on her harvest but gains on
her futures position, and vice versa. (What if hail destroys her
crop?)
• The Baker’s Hedge The baker hedges his short position (must
buy flour) with a long position in wheat futures.
If wheat prices rise, the baker loses on his flour purchase but
gains on his futures position, and vice versa. (What if he loses a
contract to deliver bread in July?).
• Hedging Summary : Hedging involves the exchange of risks
but not necessarily assets.
• Many futures, swaps, and options contracts have been
developed to facilitate hedgers
Research Approach of Arbitrageurs