Friday, August 21, 2009

Why hedging can be effective?

The hedging process can be effective in transferring risk because prices in the spot (or cash) market for commodities securities are generally correlated with prices in the futures (or forward) market. Indeed, the price of a future contracts in today‘s market represent an estimate of what the spot (or cash) market price will be on the contract's delivery date. Hedging essentially means adopting equal and apposite positions in the spot and futures markets for the same asset.

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