Hedge Your Way…

What does it mean when we say price risk? Why hedge in the first place? Should one always hedge? If not, then what is the right time to hedge? These are some of the most common yet important questions when one thinks of hedging.

In recent years, we have witnessed high volatility in commodity prices due to pandemic/disease outbreaks, climate change, supply & demand imbalances, political events, etc. For eg — Link1, Link2.

This kind of risk(called “market risk”) leaves sellers at risk of better price returns.

At Agtuall we are trying to manage the price risk by hedging.

Hedging involves taking up a position in commodity exchanges. It’s not something that is common in India.

Only a fraction of the crops are heavily traded in exchange. Soybean, Cotton, Wheat and Mustard are the largest crops traded in terms of volume. It is however gaining popularity and futures/options contracts of new crops are getting added.

What are the hedging strategies so as to protect buyers/sellers from market risk?

Futures contracts have most often been the risk strategy to do hedging. These future contracts are provided by exchanges like NCDEX, MCX. In a futures contract, a buyer/seller futures position holder agrees to buy/sell a standardized commodity at a fixed price to be delivered at a specific location at a future date. For eg — FPO(Farmer Producer Organizations) i.e a seller has decided to do maize in Kharif 2021 season and decided it wants to try hedging to manage the price risk. If FPO has a production of X kgs of maize and risk capital R, then we need to find how many contracts it needs to take and at which week in the crop year 2021–22 to take up a “sell” position in the futures market.

We built this tool HedgeHog(HH) which answers all that questions for you. If you want to know more about HH, check out our product page :) Link.

Hope you enjoyed it. Cheers!

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