Speculation and Hedging (Classic Reprint) - Hardcover

Paul H. Cootner

9780265513507: Speculation and Hedging (Classic Reprint)

Hardcover

ISBN 10: 0265513502 ISBN 13: 9780265513507

Publisher: Forgotten Books, 2018

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Excerpt from Speculation and Hedging

Hedging is usually defined by illustration. In the standard example, a buyer of (say) 5000 bushels of wheat at $2 bushel, fearful of the risk of price decline, simultaneously sells a futures contract representing 5000 bushels of wheat at $2. If the price subsequently drops to a bushel, the capital position of the buyer will be unaffected because the futures prices will also decline and the profit on his short sale of futures will exactly offset the loss on the inventory holdings. The exactness of the offset is guaranteed by the possibility of making delivery against the futures contract. Thus, by hedging, the holder of wheat eliminates the risk of price fluctuation.

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