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.

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RELATED FAQS
  1. What is the difference between hedging and speculation?

    Hedging involves taking an offsetting position in a derivative in order to balance any gains and losses to the underlying ... Read Answer >>
  2. Which of the following would be considered a short hedge ...

    The correct answer is a) Long the commodity and short the futures Read Answer >>
  3. What is a cross hedge?

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