Hedging

Locking prices with futures or options to neutralize commodity risk.

Overview

A refiner buying crude futures locks a refining margin, a farmer sells corn futures against unharvested bushels, an airline buys calls or collars on fuel. The hedge replaces price risk with basis risk, the local versus futures spread, since convergence at delivery anchors but rarely matches perfectly. Effectiveness requires sizing, hedge ratios matched to volume and sensitivity, because overhedged positions become speculation. Accounting treatment and margin calls for futures strain treasurers, the reason some prefer options, where premium is paid once and no margin follows. When the whole industry hedges the same way, liquidity thins and squeezes follow, and both the famous wins and blowups of corporate hedging trace to this desk.