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What is a Commercial Hedger?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 01 December 2016
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Commercial hedgers are corporations that seek to ensure the stability of a given commodity by taking a position in the commodities market. The exact nature of the stake or position will vary, depending on the type of influence the corporation wishes to exert on the commodity. Generally, the goal of the commercial hedger is to create a situation where the price of the commodity remains at a level considered to be desirable by the corporation.

One of the main motivating factors for employing this type of strategy is the use of the commodity in production. The commercial hedger will often make use of the commodity in the manufacture of goods and services sold by the corporation. From this perspective, it should come as no surprise that the hedger would wish to keep the price for the commodity at a level that is affordable to the corporation. This action can help to keep production costs for the company within budget, and thus improve the potential for realizing a net profit.

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When a corporation chooses to employ a hedging strategy, the commercial hedger becomes both investor and consumer. This can help the bottom line. First, by securing a futures option on the commodity, the corporation can claim valuable production materials at a desirable price. Second, the company can benefit from the stable performance and trade of the commodity on the open market. At it’s best, this approach places the commercial hedger in a win-win situation that transfers the bulk of the market risk to speculative investors who are also participating in the market.

Many different types of companies function as hedgers. In today’s market, one of the more common examples of a commercial hedger would be a business that relies on petroleum products in order to operate. The hedger would buy futures while the per barrel price for crude oil is relatively low, thus hedging against market risk involved with elevated prices in the long term.

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