Hedging
Ex - Kellogg produces cereal. A major component and cost
factor is sugar.
w Forecasted income & sales volume is set by using a fixed
selling price.
w Changes in cost can impact these forecasts.
w To fix your sugar costs, you would ideally like to purchase all
your sugar today, since you like today’s price, and made your
forecasts based on it. But, you can not.
w You can, however, sign a contract to purchase sugar at
various points in the future for a price negotiated today.
w This contract is called a “Futures Contract.”
w This technique of managing your sugar costs is called
“Hedging.”