Hedging basics?

Discussion in 'Energy Futures' started by Highterm, Sep 5, 2007.

  1. Highterm


    Apologies if this post is in the wrong section but I have a question about hedging.

    I’m interested to know how traders of physical commodities control pricing risk using the financial markets or any other method.

    An oil trading company enters into a long-term contract with a producer to purchase x number of barrels of oil a year for a certain price, with the intention of selling on to his customers at market price.
    Between the time of his agreement and eventual sale, the market price could drop.

    How do they cover this risk?

    Would anyone be kind enough to explain some of the basics to this novice please ?

    Thank you
  2. Daal


    by selling futures contracts for an equivalent amount they would be net neutral on the price
  3. vectors101

    vectors101 Guest

    traders are have a time frame of 1-3 months they can't predict what would happen 1 year in volatile futures contracts.

  4. mde2004


    They usually sell or buy futures to cover fluctuations in price.