Hedging, Basis and Spreads
Hedging questions reward one habit: write the cash price, the futures price and the basis before and after, and track the sign. This survey gives the rules; the book drills them.
Who hedges which way
A short hedger owns the commodity, or will, and sells futures to protect against a fall: farmers, producers and holders of inventory. A long hedger must buy later and buys futures to protect against a rise: processors, manufacturers and exporters with fixed-price sales. Interest-rate and currency hedges follow the same logic once you ask who is long the underlying.
Basis: cash minus futures
Basis is the cash price minus the nearby futures price. It strengthens when it becomes more positive or less negative, and weakens in the other direction. A short hedger is long the basis and gains when it strengthens; a long hedger is short the basis and gains when it weakens. For either hedger, net price equals the starting futures price plus the ending basis. A hedge swaps price risk for basis risk.
Spreads
A spread is long one contract and short another, and it profits from a change in the difference between them. If you hold the higher-priced leg, you want the spread to widen; if you hold the lower-priced leg, you want it to narrow. In agricultural markets a bull spread buys the nearby and sells the deferred. Spreads may carry lower margin, but they are not risk-free.
Where to go deeper
The PrepPass Series 3 Study Guide solves hedging problems across grains, livestock, metals, energy, Treasury, SOFR, currency and stock-index markets, with carrying-charge and full-carry spreads, crush and crack spreads, and profit-and-loss arithmetic.
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