Commercial Hedger

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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
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    Traders roll over futures contracts to switch from the front month contract that is close to expiration to another contract ... Read Full Answer >>
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    Different types of companies may enter into futures contracts for different purposes. The most common reason is to hedge ... Read Full Answer >>
  3. 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 >>
  4. How can I hedge my portfolio to protect from a decline in the food and beverage sector?

    The food and beverage sector exhibits greater volatility than the broader market and tends to suffer larger-than-average ... Read Full Answer >>
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    Investing style determines the best hedging techniques for the insurance sector. This sector comprises three segments, two ... Read Full Answer >>
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    The retail sector provides growth investors with a great opportunity for better-than-average gains during periods of market ... Read Full Answer >>

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