Is Hedging Just for Farmers?

August 31, 2016 9:50AM CDT

What is a hedge? A hedge is an investment to manage and lessen the risk of adverse price movements in an owned asset. Normally, a hedge consists of taking a counterbalance position in a related security, such as a futures contract.

Hedging has always been significant for the agricultural community as a way to protect the producer from price fluctuations or to insure that they will be able to lock in a profitable price for their crops. But hedging is not an investment tool reserved for those who grow corn, wheat and beans.  An investor with a portfolio heavy in stocks will look to sell the applicable index that includes the stocks they own.  If you have gold mine stocks, you should be looking to sell the gold futures.  If you have investments held in overseas markets effected by the fluctuation of foreign currencies, you should be looking to the US dollar and currency futures to protect your longer term investments.  If you need to purchase natural gas or heating oil at a later date, you should consider locking in a lower price now. 

As with any risk/reward trade off, hedge results in lower returns than if you “bet the farm” on a volatile investment but it also lowers the risk of losing your shirt. Diversification is the key to investment success.  Learn more about using the futures markets in tandem with your other investments. Contact us for our hedging guide or with any questions you may have.

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This material has been prepared by a sales or trading employee or agent of RJO Futures and is, or is in the nature of, a solicitation. This material is not a research report prepared by RJO Futures Research Department. By accepting this communication, you agree that you are an experienced user of the futures markets, capable of making independent trading decisions, and agree that you are not, and will not, rely solely on this communication in making trading decisions.