Modern Hedging For Everyone.
by DR. BASIL VENITIS
The business world is entering a new period full of excitement, which one day might well be called the
Era of Hedging. When this period matures, everyone in the free enterprise system will probably be
directly or indirectly involved in hedging!
What is hedging? It is the arbitrage* between futures and their corresponding spot commodities financial
instruments, or services. The classical hedger assumes a futures position exactly opposite to his spot
position. For him, hedging is a sort of insurance against severe price fluctuations. On the other hand, the
modern hedger not only seeks protection from price fluctuations, but he also tries to profit from the
variations of basis, which is the difference between futures and spot prices. The modern hedger
speculates on the basis variation by placing and lifting the hedge several times on part of his inventory.
Under normal circumstances, the futures prices are higher than the spot prices due to carrying cost. This
market is called a normal market or a carrying charge market or contango. However, when traders
are worried about possible shortages, then the futures are discounted to spots, and this is called an
inverted market. Of course, when the futures contract matures, the spot price is almost equal to the