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# 金融代写|金融衍生品代写Financial Derivatives代考|HEDGING TRANSACTIONS

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## 金融代写|金融衍生品代写Financial Derivatives代考|HEDGING TRANSACTIONS

To understand whether someone is truly hedging, speculating, or engaging in some activity in between, it is useful to understand how one uses a derivatives contract to offset a cash market risk. As the CFTC definition implies, a hedge position is one that involves two positions having values that move in opposite directions. One of the positions is in the cash market and normally is held as a result of the ongoing operation of an enterprise. The other position is in a derivative, such as a futures or option contract, and is entered into for the purpose of hedging.

A classic example of a hedging transaction is the farmer trying to protect himself from a fall in the value of crops he is producing. Consider the risk a farmer faces when he plants corn in the spring. The farmer has committed a certain amount of resources in terms of seed, fertilizer, and time to producing the corn. If prices are low in the fall when the farmer goes to sell his corn, he faces the risk that he will not be able to cover the costs of his inputs. In the language of the CFTC definition, he faces financial losses from adverse price changes. This risk can be offset, however, through the use of a futures contract.

Suppose the farmer believes that he will be able to get $\$ 2.90$per bushel at harvest for his corn. Referring to Exhibit 3.1, on May 1 the farmer consults the Chicago Board of Trade price for December delivery of corn and sees that the contract is currently selling for$\$3.00$ per bushel. He decides to sell 10 futures contracts to cover his expected production of 50,000 bushels. On December 1 , the price of corn in his local area is $\$ 2.65$per bushel, insufficient to cover his production costs. However, at the same time, the price of a futures contract has fallen to$\$2.75$ per bushel. Since the farmer initially sold the futures contracts at $\$ 3.00$per bushel, he can now purchase them back at$\$2.75$ per bushel, thereby generating a profit of $\$ 0.25$per bushel, offsetting the lower price on his physical corn. The supplemental value from the futures transactions ultimately allows the farmer to net a sale price of$\$2.90$ per bushel, thereby covering his production costs.

Whether an individual or company is hedging agricultural commodities, energy commodities or financial assets, hedges using derivatives contracts, whether they are futures traded on an organized exchange or swaps traded off of an exchange, all function in generally the same fashion: They allow hedgers to hold a financial contract that fluctuates in value opposite that of the commodity or asset they are trying to hedge. In some cases, like the example of the farmer, the asset or commodity being hedged is already held by the hedger, who faces the financial risk that the commodity or asset being held will fall in value before it is sold. Under such circumstances, the hedger would sell a futures contract to hedge this exposure. Such hedges are referred to as short hedges because the hedger has sold, or “gone short,” the futures contract.

## 金融代写|金融衍生品代写Financial Derivatives代考|SPECULATION

If the classic depiction of hedging is the farmer locking in a sale price for a crop, the classic speculator is the commodities trader who buys a pork bellies contract for no other reason than he believes prices will rise. Years ago, such speculators were limited to agricultural products or precious metals. Today, individuals wanting to chase profits have a panoply of choices available to them, ranging from physical commodities-agricultural products, metals and energy-to financial products-interest rate instruments, stocks, and foreign currencies. In today’s markets, one can even take a view on temperature, rainfall, or even election results.
For the moment, as with the case of hedgers in the previous section, we will consider speculation in its purest form. That is, speculation is the taking on of a price risk for the simple purpose of trying to profit based on expectations of which way prices will move. Speculators who expect prices to rise will enter into long positions, while those believing they will fall short the market.

Speculators can be categorized in several different ways. One common way is to classify them by how they form their price expectations. Those relying on basic economic conditions to form expectations are referred to as fundamental traders. Traders in an alternate group, which form expectations based on analyses of price patterns and other market statistics, are called technical traders.

Fundamental traders operate on the premise that futures prices reflect the underlying conditions related to the supply and demand of commodities and the valuation of financial assets. The goal of the fundamental trader is first to identify the key economic conditions and variables that affect prices and second to observe changes in those conditions, it is hoped, before they are incorporated into the market price. For example, a fundamental trader interested in trading Eurodollar futures would be concerned with Fed policy, inflation rates, and other economic indicators that would signal upcoming changes to Eurodollar rates. A fundamental trader of physical commodities similarly would be concerned with factors that would increase or decrease the supply or demand for a commodity. If the trader can gain an edge in terms of gathering information on these factors and take a position in the market before the market has incorporated the information, she stands to gain from her efforts.

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