Hedging is a form of hedging that is undertaken to reduce the risk of adverse price movements in an asset. Hedging is typically accomplished by taking an offsetting or opposite position in the underlying asset to offset potential gains or losses that may arise from adverse market movements. The most common instruments for hedging are derivatives and futures contracts.
Commodity price insurance tools
There are four instruments for hedging commodity prices, including futures contracts, forward contracts, options and swaps.
Futures Contract
A commodity futures contract is a contract to buy or sell a commodity at a specified future date. Commodity futures contracts are regulated and traded on exchanges and are therefore standardized in terms of the quantity and characteristics of the underlying commodity.
Although futures contracts are based on the sale of a commodity in the future, they are usually settled in cash and rarely result in actual delivery. Therefore, market participants in commodity futures trading are not necessarily producers of the commodity or buyers looking to buy it.
Futures contracts cover a wide range of commodities including agricultural commodities, industrial raw materials, metals and energy. Due to the emergence of financial futures contracts based on financial assets and indices rather than commodities, commodity futures trading today represents a relatively small portion of the overall futures market.
Futures contract
A forward contract is similar to a futures contract in that it is an agreement to buy or sell a commodity at a future date, but a forward contract differs from a futures contract in that it is not standardized and is usually traded over the counter rather than on an exchange. This means that the transaction costs of hedging price risk using a forward contract can be higher than with a futures contract.
The terms of a futures contract are negotiated between parties in a decentralized over-the-counter market. Therefore, futures contracts can be customized to suit the specific needs of the parties involved. For example, the parties involved can agree on a fixed price to sell a commodity or a reference price in the future and specify other individual contract features.
Option contract
A commodity exchange option is an instrument that gives the buyer and seller of a commodity a minimum and maximum price respectively. In this, the option buyer pays the counterparty a premium for the right to buy or sell the underlying commodity at a predetermined price on or before the expiration date. A call option gives the holder the right to buy the underlying commodity, while a put option represents the right to sell the underlying commodity.
Options do not involve an obligation to buy or sell a commodity, and if they are not exercised, the premium is the only cost to the holder. Options are traded both on exchanges and in the over-the-counter market. Exchange-traded commodity options typically have a commodity futures contract, rather than a physical commodity, as the underlying asset.
Swap contract
A commodity swap is a financial instrument in which contracting parties exchange cash flows based on the price of an underlying commodity. Commodity producers use swaps to hedge price risk. For example, grain producers enter into swaps to secure the price of their product and hedge against the risk of falling prices.
Commodity swaps are typically sold over-the-counter and are not traded on exchanges. Like futures and options, commodity swaps represent a relatively small portion of the market, while the majority of swaps are based on other assets or indices, such as interest rates or exchange rates.
Benefits of cargo insurance
Protect your assets and business
For businesses involved in commodity trading, commodity price insurance helps protect their assets and business operations from risks from price fluctuations, especially for businesses operating in the field of commodity production.
Protection against price risk
Insurance helps protect commodity investors from risks caused by price fluctuations in derivative commodities. This helps minimize the risk of damage or loss due to market fluctuations.
Increased liquidity and flexibility
Insurance enhances investors' liquidity and flexibility by mitigating risk, allowing them to focus on finding new investment opportunities without worrying about price risk.
Commodity Investing - A Great Price Hedging Tool
With the aim of finding a solution to help reduce the risk of price fluctuations, causing difficulties for both farmers and businesses. Commodity price insurance was born to help farmers or businesses avoid unstable price fluctuations. From there, they can rest assured to produce and control the market as well as determine the profit before producing or planting.
If in the past, farmers were worried about good harvests and low prices, with commodity price insurance, price fluctuations do not affect previously made transactions, and do not have to follow market prices, helping people to grow crops more stably.
Currently, Southeast Asia Commodity Trading Joint Stock Company (SACT) is a prestigious commodity price insurance consulting company in the market. With a team of employees with many years of experience in this market, SACT is committed to helping farmers, businesses and investors protect and increase their assets in the most effective way! For details, please contact hotline: 0945435430 for detailed advice.
Contact information:
Head office: CT36A, Dinh Cong, Hoang Mai, Hanoi.
HCM Branch: 75 Hoang Van Thu, Phu Nhuan, Ho Chi Minh City
Website: https://hanghoaphaisinh.com/
Fanpage: https://www.facebook.com/giaodichhanghoaSACT
Email: [email protected]
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