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Hi

This is a bit of fundamental but this part has always got me confused. Please correct me if I am not thinking in the right direction:

the 1st one, producer is exposed to increase in pricing as he will lose the chance to sell at higher price so the appropriate hedge is long position in futures contract? Using the gains from long futures to cover losses from selling underlying at less favorable price? So at the delivery date, what will happen is producer will sell underlying at 3 and buy underlying at 3 whereas the spot price is already 5? This way technically he is not delivering but the value of his underlying is lifted?

the 2nd one, he is exposed to decrease in price how is the producer short the underlying and enter into a short hedge at the same time? is it a typo? Assuming the hedge is long position in futures contract, what will happen is he will sell the underlying at future spot price at say 2 and long the underlying at 2 which offsets the decrease in price?

The numerical example could be wrong but if you can also walk me through numbers that would be easier for me to understand.

This is a bit of fundamental but this part has always got me confused. Please correct me if I am not thinking in the right direction:

*Consider a coffee producer who plans to sell 100 pounds of coffee on a future date under*

two different scenarios:two different scenarios:

*To a key customer, the coffee producer promises to sell 100 pounds, on a date one year in the future, at $3.00 per pound.*

*To a key customer, the coffee producer promises to sell 100 pounds, on a date one year in the future, at the future spot price (which is obviously unknown today*

- In the first scenario, the producer is exposed to a future spot price increase, such that the appropriate hedge is a long position in coffee futures contracts. Because the sales price of $3.00 is predetermined, the underlying exposure is effectively a short position, such that the hedge instrument is a long position to offset.

- In the second scenario, the producer is exposed to a future spot price decrease, such that the appropriate hedge is a short position in coffee futures contracts. In this case as the future sale price is not predetermined, the underlying exposure is effectively a short position such that the hedge instrument is a long position.

the 1st one, producer is exposed to increase in pricing as he will lose the chance to sell at higher price so the appropriate hedge is long position in futures contract? Using the gains from long futures to cover losses from selling underlying at less favorable price? So at the delivery date, what will happen is producer will sell underlying at 3 and buy underlying at 3 whereas the spot price is already 5? This way technically he is not delivering but the value of his underlying is lifted?

the 2nd one, he is exposed to decrease in price how is the producer short the underlying and enter into a short hedge at the same time? is it a typo? Assuming the hedge is long position in futures contract, what will happen is he will sell the underlying at future spot price at say 2 and long the underlying at 2 which offsets the decrease in price?

The numerical example could be wrong but if you can also walk me through numbers that would be easier for me to understand.

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