1. Hedging
Hedging is simply shifting the risk of price change in the cash market to the
futures markets.
This involves simply taking an opposite position in the cash market relative to
the future position.
Hedging Example:
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3. Basis Basis is simply defined as the difference between
cash and futures prices.
Example: On Jan.10, the cash corn price is $3.00/bu
March futures contract is trading at $ 3.20/bu
_____________________
March Basis = -$0.20/bu
The negative sign attached to the basis indicates that
the cash price is lower than the futures price. .
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4. Improving Basis March corn futures $ 3.25 $ 3.25 $ 3.00
Cash corn $ 2.85
Jan. 1
Feb. 1
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5. Deteriorating Basis March corn futures $ 3.25 $ 3.25 Cash corn $ 2.85
$ 2.50
Jan. 1
Feb. 1
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7. Cause of Changing Basis
Supply and Demand
Protein supply
Conditions of crop
Transportation
Storage Availability.
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8. Hedging
Hedging shifts the risk of absolute or total price movement to basis movements.
An element of risk still still exists with all hedge.
Types of Hedges:
Short Hedges: It is used to protect against declining value of the cash position.
Long Hedges: It is used to protect against increasing values of the cash position.
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10. Computing Net Hedge Prices
Short hedge: need to calculate net hedge selling price (NHSP).
NHSP=CP+FP
Long hedge: need to calculate net hedge buying price (NHBP)
NHBP=CP-FP
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