Quote from sle:
Define hedging, to begin with.
Google results:
http://en.wikipedia.org/wiki/Hedge_(finance)
"
A hedge is an investment position intended to offset potential losses that may be incurred by a companion investment. In simple language, a hedge is used to reduce any substantial losses suffered by an individual or an organization.
A hedge can be constructed from many types of financial instruments, including stocks, exchange-traded funds, insurance, forward contracts, swaps, options, many types of over-the-counter and derivative products, and futures contracts.
Public futures markets were established in the 19th century[1] to allow transparent, standardized, and efficient hedging of agricultural commodity prices; they have since expanded to include futures contracts for hedging the values of energy, precious metals, foreign currency, and interest rate fluctuations.
...
...
...
"
http://www.lme.com/who_why_hedging.asp
"
What is hedging?
Hedging is the process of managing the risk of price changes in physical material by offsetting that risk in the futures market. Hedging can vary in complexity from a relatively simple activity, through to a highly complex strategies, including the use of options.
The ability to hedge means that industry can decide on the amount of risk it is prepared to accept. It may wish to eliminate the risk entirely and can generally do so quickly and easily using the LME.
Managing price risk means achieving greater control of either the cost of inputs, or revenues from sales, or both; planning for the future based on assured costs and revenues; and eliminating concerns that a sharply adverse move in the price of material could turn an otherwise flourishing and efficient business into a loss maker.
Hedging by trade and industry is the opposite of speculation and is undertaken in order to eliminate an existing physical price risk, by taking a compensating position in the futures market. Speculators come to the futures market with no initial risk. They assume risk by taking futures positions.
Hedgers reduce or eliminate the chance of further losses or profits, while the speculators risk losses in order to make profits.
Before starting a hedging programme it is essential to assess the risk due to exposure to the price of physical material. Once the hedger has an understanding of the tools available at the LME, it is relatively easy to select the appropriate action to manage this risk. It is important that this action is properly managed at all times and that the appropriate controls and approval procedures are in place.
It is generally advisable to work with an LME broker so that expert advice can be taken in devising a hedging programme.
"
