Hedging Price Risk

Chris Heilpern ()

Chapter Chapter 6 in Understanding Risk Management and Hedging in Oil Trading, 2023, pp 79-86 from Springer

Abstract: Abstract Managing price risk is generally called “hedging” which comes from an old English agricultural expression literally involving hedges (bushes or trees planted like a fence). This chapter will continue with the principle learned from the Smiley and Frowny Faces and show the reader how to offset price risk. In a nutshell, hedging is about offsetting a loss caused by a price movement by creating a position that makes money from that same price movement. Sometimes hedges can be perfect…or nearly. Sometimes hedges are imperfect and some risk is left over; we call that “basis risk.” This chapter talks about unwanted basis risk and intentional basis risk; traders very often hedge imperfectly on purpose to make money.

Date: 2023
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DOI: 10.1007/978-3-031-44465-4_6

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