Level2StockQuotes.com - Futures Trading Markets - Hedgers Articles

The principle of hedgers is simple but can be somewhat complex. In this article we attempt to clarify futures hedgers...

Futures Trading Markets - Article to better explain what hedgers do...

The principle of hedgers is simple but can be somewhat complex. In this article we attempt to clarify futures hedgers and what benefit they have. The hedgers in the futures market buy and sell futures contracts mainly to establish a price level many weeks or even months in advance, this is done to establish a know futures price level for goods they later intend to buy or sell in the cash market or bond market. Some hedgers use the futures market to lock in a price that is acceptable somewhere between their buy and sell price, this is a margin between the two prices.

When thinking about hedgers take the following examples in consideration to better explain what hedgers do in the futures markets.

Example of Futures Trading, Hedgers: Plastic Furniture Manufacturer - In this example we talk about a plastic furniture manufactures and the need to lock in the price to establish a set or known crude oil futures price. In the future the plastic furniture manufacturer needs to buy more raw polymer plastic pellets or material from their suppliers to keep up with demand and to build more furniture to meet the demand in the upcoming summer season. But the manufactures fears that the rising crude oil futures price could increase in value and the raw material they need to buy from their suppliers over the next few months to a year. This will present a problem because the plastic furniture manufacturer advertises and promotes their catalogs to merchants and distributors in advance sometime up to a year in advance, if the price of crude oil futures increases all their catalogs and promotional material is no good useless. So what can the plastic furniture manufactures do to protect themselves from rising crude oil prices.

The plastic furniture manufacturer would buy futures crude oil contracts at a set price lets say for $50 a barrel.

Now six to eight months later crude oil futures, the base for all raw plastics have risen higher and oil futures is now at $70 a barrel, the plastic furniture manufacturer will pay their suppliers an increase for the raw material cost because of the rise in crude oil futures. But since the furniture manufacturer locked in crude oil futures and bought at a set price of $50 a barrel six to eight months earlier the manufacturer now can sell the crude oil futures contracts in a cash market for a profit and offset the increasing raw material costs of the suppliers. This keeps the cost of the products the same in their promotional catalogs and advertising campaigns.

Example of Futures Trading, Hedgers: Gold Jewelry Manufacturer - In this example we talk about a gold jewelry manufacturer and the need to lock in the price to establish a set or known gold futures price. In the future the jewelry manufacturer needs to buy more gold from their suppliers to keep up with demand in the future, but the manufactures fears that the gold price could increase in value over the next few months to a year. This will present a problem because the jewelry manufacturer advertises and promotes their catalogs to gold jewelry merchants and distributors in advance sometime a year in advance, if the price of gold increases all their catalogs and promotional material is no good useless. So what can the gold jewelry manufactures do to protect themselves from rising gold prices.

The gold jewelry manufacturer would buy futures gold contracts at a set price lets say for $850 an ounce. Now six to eight months later gold futures have risen higher and gold futures is now at $970 an ounce, the gold jewelry manufacturer will pay their suppliers that amount for an ounce of gold. But since the jewelry manufacturer locked in gold futures and bought at a set price of $850 six to eight months earlier the manufacturer now can sell the gold futures contract in a cash market for a profit and offset the increasing gold price per ounce they pay their suppliers. This keeps the cost of the products the same in their promotional catalogs and advertising campaigns.

Futures Trading Markets - Hedgers Articles Continued...

Futures Trading Markets - Hedgers Articles Continued...

When hedgers and speculators enter in the market, they are buying futures contracts to try and protect themselves from future price increases or future market declines and make a profit either way.

The number of hedgers and strategies in the futures markets are virtually limitless and hedging can save a business from rising costs short term and long term. The bottom line, hedgers can offset against interest rates and rising costs of production materials and stock prices. Futures hedgers have for the most part control over price a set an acceptable price for a given commodity their willing to buy or sell in the future. Hedging is the best way to try to provide the investor, speculator or merchant some form of security or protection against risks in the futures markets price changes.

Futures Trading What is a Futures Contract:
Futures contracts consist of two main contracts, futures contracts that are for real delivery of a commodity and those futures contracts that are for a cash settlement.

Futures cash settlement is simply the holding of a cash settled future until expiration. At that time, there is a final margin payment, and the contract expires.

Very few futures contracts are the delivery type of contract. Most hedgers, speculators and investors in the futures markets do not have any desire to take delivery of say 500,000 pound of grain or sugar contracts they bought or sold.