Why do commodity traders hedge?

Opening Amsterdam commodity exchange in 1917 (source: Stadsarchief Amsterdam) Many times when having conversations with people who are not in the commodity industry, they obviously ask what you are making exactly. I try then to explain that we are making software for specific industries such as cocoa, coffee, sugar, grains etc. and that it is very specific because our clients run next to their ‘normal’ administration also a derivatives administration. Most of the times people ask a second question, why are they doing that? That is a real proper question, why are they doing that? I then try to explain that these people have to protect themselves against market price fluctuations and before I notice I have lost them as I get into too much details about futures, options, OTC’s, position management. Obviously they try to escape from the conversation as the stuff gets over complicated and the result is that I was still not able to answer why they run also a derivatives administration. The question itself remains very valid, many times I take for granted that everybody wants to ‘hedge; themselves against market price fluctuations. As a company should focus on his added value, instead of speculating (gambling)… continue reading

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