Hedging strategies of derivatives instruments for commodity trading entities

Agricultural derivatives play an active role in price determination and transparency in the local agricultural market whilst providing an efficient price risk management facility. Producers and users of agricultural commodities hedge their price risk, thereby limiting their exposure to adverse price movements. This encourages increased productivity in the agricultural sector as farmers and users are able to concentrate their efforts on managing production risks. These are the risks associated with variables such as the weather, farm/production management and seasonal conditions. The futures market exists mainly for the purpose of allowing commercial users to hedge their transactions or lock in favourable prices. The market could not operate efficiently and effectively without speculators, who provide the necessary market liquidity. It allows commercial users to hedge. Speculators use futures and options in an attempt to make profits on short-term price movements. The aim of this article is to determine price risk value on wheat market and find hedging for commodity producers.