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In times like COVID-19 crisis, commodity trading companies are especially susceptible wild swings of commodity prices. The companies that emerged as winners are the ones that hedged their portfolios effectively with commodity hedges.
The commodity markets are made up primarily of speculators and hedgers. While speculators are all about taking on risk in the markets to make money, the function of hedgers is to reduce their risk of losing money. A hedger is an individual or company that is involved in a business that is associated with a particular commodity, either as producers or buyers.
Hedging is simply a form of insurance. It is essentially a means of securing yourself so that in the event of those bad incidents that are part of life, the effects on your finances are greatly reduced. Hedging is not limited to the trading and investment world as it occurs every day. Take, for instance, when you take insurance on your car or house, you are hedging against unforeseen disasters that might negatively affect your house or car. Professionals and institutions in the financial market, like portfolio managers, individual investors, and corporations also use hedging techniques to reduce their exposure to various risks.
How Commodity Hedges Works?
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However, hedging in that field is not as simple as paying an insurance company a fee every year for coverage because mitigating investment risk means strategically using financial instruments or market strategies to offset the risk of adverse price movements. In this sphere of business, investors hedge one investment by making a trade-in another. Indeed, they can hedge against a plethora of things: stocks, commodity prices, currency and interest rates, among others.
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https://www.enhelix.com/commodity-hedges/
