Errera & Brown - Chapter 5
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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.