Types of Derivatives Trading
Derivatives transactions are often classified according to the objectives of the transacting parties. One objective is hedging, which involves the transfer of an unwanted risk to another party. An agricultural chemical company, for example, might want to lock in a price of soybeans for future purchase rather than face the risk of changes in the price. A long hedge means that the hedger will be compensated not only for unfavorable price movements but for favorable movements as well; the hedger has traded away price risk by locking in, for better or worse, a fixed price.