InvestorQ : What is hedging and how do commodity markets help on hedging?
shivangi Arora made post

What is hedging and how do commodity markets help on hedging?

Dawn Cherian answered.
3 years ago

This is one of the most important functions of the commodity market in that it helps distribute the risk and protects the originator of the risk. Take the case of a jewellery manufacturer who wants to hedge against gold price volatility. The same can be done by selling gold futures and locking in the price. Similarly, an FMCG food products company that wants to hedge against volatility in agricultural products can also use the futures market to hedge their position. What the market does is that the overall risk tends to become granular and more numbers of traders tend to share the risk.

Commodity markets in India are still at a nascent stage and have a long way to go. Having said that; they have an important role to play in discovering the price and hedging the risk of commodities in India. Hedging the risk is all about risk reduction and risk can only be reduced by spreading it across more traders who are willing to take that risk in exchange for a possible return. That is what creates the commodity markets in the first place.