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Hedger

A market participant who uses futures to offset a price risk they already carry in the physical world, accepting a known price instead of an unknown one.

A farmer with a growing crop, a bakery buying flour, an airline burning jet fuel and a bond fund with duration risk are all hedgers. None of them is trying to profit from the futures position; they are trying to make their real business immune to price.

A successful hedge looks like a losing trade half the time, and that is the point. The farmer who sells corn futures at $4.60 and watches corn go to $5.20 loses on the futures and gains on the crop. Hedgers who abandon the discipline when the futures leg is losing are the classic case study in why hedging programmes fail.

Hedgers are the reason futures markets exist, and regulators treat them differently: they can apply for a hedge-exemption from position limits and are reported separately in the commitments-of-traders data.

Example: a miller needing 500,000 bushels of wheat in September buys 100 contracts at $5.80. If cash wheat rises to $6.40, the futures gain 60 cents x 5,000 x 100 = $300,000, offsetting the higher cash cost almost exactly.

Related: speculator, short-hedge, long-hedge, hedge-exemption, commercial-trader

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