Hedge Transactions on the Stock Exchange

Hedge operations are particular stock market operations through which stock market traders, producers, intermediaries intend to cover the unfavorable outcome of the goods price on the cash market (physical). Price hedging by hedge operations is possible with the similarity and possible convergence between cash and futures prices. Since both markets are influenced by changes in the same general factors of market, prices tend to move in the same directions, but not necessarily with the same magnitude. The exposure rank to price risk which can be minimized depends on the correlation rank between the cash price changes and the future prices variations. Hedgers manage to decrease losses by using this type of transaction.