ACCT 540 Week 4 Course Project
Hayley Wicks
ACCT 540
Week 4: Course Project (Case 1)
Typically, hedging strategies are implemented as a means of protection. The dictionary tells us that hedging strategies involve making counterbalancing investments in order to avoid a loss. With regards to the futures market, hedging strategies involve a position in the market that is the opposite of an entity’s current position. Any gain or loss in the cash market is usually followed by a counterbalanced effect in the futures market since the two markets tend to move up and down together. The counterbalanced movement of the two markets is not necessarily identical, but it is usually enough to mitigate the risk of significant loss in the cash market. Hedging is common for farmers or livestock producers that need protection against price drops in livestock or in crops, and also for protection against price increases on purchased inputs such as fertilizer. Like the farmers seeking hedging strategies to mitigate the risks that come with rising prices of purchased goods, Thomas Foods hopes to do the same for the goods they purchase from the farmers.
Several of the sources I came across when researching for this course project included examples that really helped to expand my understanding of hedging strategies and how they work. The example I found to be most helpful was about a hedging strategy employed by a soybean farmer. The article explained that if the soybean farmer plans to sell his crops in October, and he estimates in May that he will sell them for $10 a bushel. If the price per bushel declines between May and October, then the soybean farmer will suffer a loss. The article stated that the farmer could protect himself from potential price declines and hedge by selling an equivalent number of bushels in May in the futures market and then buying them back in October when it will be time for him to sell his crops in the cash market. That way, if the price per bushel declines when it is time to harvest the
ACCT 540
Week 4: Course Project (Case 1)
Typically, hedging strategies are implemented as a means of protection. The dictionary tells us that hedging strategies involve making counterbalancing investments in order to avoid a loss. With regards to the futures market, hedging strategies involve a position in the market that is the opposite of an entity’s current position. Any gain or loss in the cash market is usually followed by a counterbalanced effect in the futures market since the two markets tend to move up and down together. The counterbalanced movement of the two markets is not necessarily identical, but it is usually enough to mitigate the risk of significant loss in the cash market. Hedging is common for farmers or livestock producers that need protection against price drops in livestock or in crops, and also for protection against price increases on purchased inputs such as fertilizer. Like the farmers seeking hedging strategies to mitigate the risks that come with rising prices of purchased goods, Thomas Foods hopes to do the same for the goods they purchase from the farmers.
Several of the sources I came across when researching for this course project included examples that really helped to expand my understanding of hedging strategies and how they work. The example I found to be most helpful was about a hedging strategy employed by a soybean farmer. The article explained that if the soybean farmer plans to sell his crops in October, and he estimates in May that he will sell them for $10 a bushel. If the price per bushel declines between May and October, then the soybean farmer will suffer a loss. The article stated that the farmer could protect himself from potential price declines and hedge by selling an equivalent number of bushels in May in the futures market and then buying them back in October when it will be time for him to sell his crops in the cash market. That way, if the price per bushel declines when it is time to harvest the