Hedger

Hedger

An investor who takes steps to reduce the risk of an investment by making an offsetting investment. There are a large number of hedging strategies that a hedger can use. Hedgers may reduce risk, but in doing so they also reduce their profit potential.

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Hedger. Hedgers in the futures market try to offset potential price changes in the spot market by buying or selling a futures contract.

In general, they are either producers or users of the commodity or financial product underlying that contract. Their goal is to protect their profit or limit their expenses.

For example, a cereal manufacturer may want to hedge against rising wheat prices by buying a futures contract that promises delivery of September wheat at a specified price.

If, in August, the crop is destroyed, and the spot price increases, the manufacturer can take delivery of the wheat at the contract price, which will probably be lower than the market price. Or the manufacturer can trade the contract for more than the purchase price and use the extra cash to offset the higher spot price of wheat.