Q. What is the main purpose of hedging in commodity futures markets?
Answer: To reduce or eliminate price risk
Notes: Hedging in commodity futures markets involves entering contracts to offset potential price fluctuations in commodities. This practice is used by producers and consumers to maintain price certainty for inputs or outputs. Futures contracts lock in prices for future transactions. Producers like farmers and consumers like manufacturers commonly use hedging. Hedging does not focus on profit maximization but on minimizing financial exposure. The primary purpose is to manage and reduce price risk arising from unpredictable market changes.