Hedging 101: hedging with agricultural options

Commodity traders – as well as most other traders – tend to be risk averse. That is to say, they prefer situations with low uncertainty over situations with high uncertainty. Or better yet, no uncertainty at all. However, in economics and finance, as well as in life, things are never one hundred percent certain, nor do the most certain outcomes yield the best results. Luckily, there are tons of tools to deal with uncertainty as a solution to your risk aversion. In this article, we dive into the world of agricultural trade options: tools for managing agricultural price risk exposure. When talking about risk aversion, the term hedging is never far away. Hedging here has nothing to do with gardening or trimming and maintaining the perimeter of your property, but literally means seeking a strategy that tries to limit risks in financial assets. It is not a way to make a profit, but rather to prevent or at least minimize possible losses. Hedging In life we all hedge – it’s not limited to financial markets. The best way to understand hedging is by comparing it to insurance. Do you have a health insurance policy or coverage against fire damage to… continue reading

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