Commercial Hedger


DEFINITION of 'Commercial Hedger'

A corporation that purchases futures to control its costs. When a corporation uses a commodity in the creation of its product or service, hedging can help to keep that commodity affordable. A construction company, for example, could be called a commercial hedger if it purchased steel futures to control its rebar costs. Another example is an airline company that purchases crude oil futures to balance its fuel costs.

BREAKING DOWN 'Commercial Hedger'

Commercial hedging is a way for companies to reduce price risk by locking in the price of production goods. This practice can be used in almost any line of business, but it is common in agriculture and banking. Companies also commonly hedge against interest-rate risk and foreign-exchange risk. Hedging does not eliminate the possibility of a corporation being negatively impacted by price changes, but it can soften the blow. This is similar to an individual purchasing homeowner's insurance. The insurance doesn't eliminate the possibility of his house burning down, but does drastically reduce the costs he'll have to pay if it does.

  1. Hedge

    Making an investment to reduce the risk of adverse price movements ...
  2. Derivative

    A security with a price that is dependent upon or derived from ...
  3. Commodity

    1. A basic good used in commerce that is interchangeable with ...
  4. Price Risk

    The risk of a decline in the value of a security or a portfolio. ...
  5. Interest Rate Risk

    The risk that an investment's value will change due to a change ...
  6. Futures

    A financial contract obligating the buyer to purchase an asset ...
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  1. Do hedge funds invest in commodities?

    There are several hedge funds that invest in commodities. Many hedge funds have broad macroeconomic strategies and invest ... Read Full Answer >>
  2. Can mutual funds invest in options and futures?

    Mutual funds invest in not only stocks and fixed-income securities but also options and futures. There exists a separate ... Read Full Answer >>
  3. How do futures contracts roll over?

    Traders roll over futures contracts to switch from the front month contract that is close to expiration to another contract ... Read Full Answer >>
  4. Why do companies enter into futures contracts?

    Different types of companies may enter into futures contracts for different purposes. The most common reason is to hedge ... Read Full Answer >>
  5. What does a futures contract cost?

    The value of a futures contract is derived from the cash value of the underlying asset. While a futures contract may have ... Read Full Answer >>
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