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What Form of Hedging Would You Suggest for a Producer

question 23

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What form of hedging would you suggest for a producer that wishes to be protected from future price decreases but wants to benefit from any future price increases?


Definitions:

Forward Contracts

Agreements to buy or sell an asset at a future date for a price specified today, not traded on an exchange.

Counterparty Risk

The risk that the other party in an agreement will default or fail to live up to their contractual obligations.

Futures Markets

Financial markets that facilitate the buying and selling of future contracts, which are agreements to buy or sell an asset at a future date at a price specified today.

Financial Contracts

Agreements between parties to conduct a financial transaction according to specified terms.

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