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  • 4.8-COTTON TRADING-HEDGING AND MARKET SYSTEMS

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  • Hedging and market systems

    Chapter 4 - Cotton trading - Hedging and market systems

     
     
    Global cotton merchandizing is a very capital-intensive industry, so hedging the various risks involved is an absolute must if traders are to gain and maintain success for long periods of time. Any individuals or companies that take ownership of cash cotton should avail themselves of any available hedge. Most of the time the entities involved in the cash trading of cotton are growers, merchants and textile mills.

    Predicting accurate future price trends in the cotton market with any consistency is absolutely improbable if not down right impossible for any individual. There are just too many unpredictable occurrences that cause price fluctuations and market volatility for any one person to even guess at what the price will be over any given period of time. Therefore, some form of price risk management is necessary in order for a business to survive the market ups and downs.

    Proper hedging is defined by offsetting a purchase or sale of cotton with a countertransaction. When the price is fixed it should be immediately hedged by either a counter cash transaction or a future contract. Since it is rare that back-to-back cash business can be transacted, the most usual countertransaction would be a futures contract.