Hedging
Hedging is a strategy used to reduce the risk of price changes in commodities by locking in prices through contracts or financial instruments.
Quick Reference:
Risk Reduction. Institutional. Complex.
Expanded Explanation:
Hedging is a common risk management tool in commodity markets. It involves taking an offsetting position. For example, a farmer might sell wheat futures to lock in a price before harvest, or a mining company might use forward contracts to secure a stable revenue stream despite market volatility. Whilst hedging limits losses from falling prices, it also means missing out on potential gains if prices rise.
In modern times, entire investment firms run solely around the arbitrage opportunities presented by hedging. These are known as hedgefunds and are typically considered instiutional. That is to say, this investment strategy is not typically used by mum and dad investors.