Targeted financial instruments are especially suited for firms with large exposures to
commodity prices, currencies, interest rates, or the overall stock market. These exposures
derive not only from the firm’s inputs, outputs, or production processes, but also from
risks passed along from its suppliers, employees, customers or competitors. A candy
producer, for instance, may have a substantial risk exposure to sugar prices, and can
hedge this risk using sugar futures. Likewise, an oil producer can sell its production
forward to reduce its exposure to oil price risk. A manufacturer of recreational vehicles
typically has substantial exposure to oil and gasoline price risk; it can hedge these risks
contractually through oil or gasoline futures or forwards.