EBF 301
Global Finance for the Earth, Energy, and Materials Industries

Reading Assignment: Lesson 9

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Reading Assignment:

Errera & Brown - Chapter 5

Key Points of Emphasis

  • Hedging reduces both physical and financial risk.
  • Hedging is performed by commercial entities; it is not "trading."
  • Hedgers have two positions, one in financial and one in physical.
  • Hedgers must take an opposite position in the financial market to the one they have in the physical market.
  • Commodity producers are "long" the physicals and must sell the financials.
  • Commodity consumers are "short" the physicals and must buy the financials.
  • Multi-month hedges or, "strips," can be obtained.