What is hedging and how it is done in commodity market ?
The commodity market has primarily two types of participants as speculators and hedgers.A hedger is a person or company whose business is related to some commodity. Commodity market is highly price volatile so they try to hedge against this future price risk by entering in to future contracts of commodities. MCX Tips as recommended by market analysts are also helpful to perform better while trading in commodities.Hedging means to control risk or reduce its impact. It is a two step process done by taking position that is opposite to the one taken in physical market with an aim of reducing the risk associated with future price changes.
The way by which hedging can be done is explained below:
While hedging the hedger makes an attempt to fix the price at a level with an objective of ensuring certainty in the revenue that will be generated through sales.There are other participants as well like speculators and arbitrageurs who are present in commodity market trying to make benefit from price fluctuations.
Let us take an example of copper-
A manufacturer of electronic products buys huge quantity of copper as raw material.He further enters into an agreement to supply electronics products to a dealer three months later. Contracts expiration date and other conditions are pre decided. Now there is risk if price of copper increases. In order to successfully hedge against this price risk he can take long position of copper future contract with a maturity date of three months.
In case the price of copper increases after three months it will increase the value of contract in which manufacturer has taken long position.But he also has to buy copper in physical market to meet his dealer obligations.This means he faces loss in physical market. But this loss is compensated by gain made in the future market.
On the other hand if price of copper decreases after three months the value of future contract will decrease. Manufacturer has to buy copper in physical market to meet his dealer obligations , which means he will earn significant profit. This profit earned in physical market will help in compensating loss made in future market.
This is how hedging is done to cope up with risk of price fluctuation prevailing in commodity market in a better way. Both producers and consumers of commodities face risk of price. Producer of a commodity has risk if price gets lowered and conversely consumers has a risk if price gets higher. Market experts can be consulted as well for better management of risk and returns in commodity market.They can give their valuable recommendations on mcx trading tips after carefully analyzing the market. For making precise prediction on market fluctuations having a good knowledge about market is must.