A rice trader has planned to sell 22,000 kgs. of rice after 3 months from now. The spot price of the rice is ₹60 per kg and 3 months future on the same is trading at ₹59 per kg. Size of the contract is 1,000 kg. The pric

The rice trader faces the risk of a price fall in the future, which would reduce his profit. To mitigate this risk, the trader can use a hedging strategy by selling futures contracts today. Since he plans to sell rice in the spot market after 3 months, he can simultaneously sell an equivalent quantity of rice in the futures market today at the current future price of ₹59 per kg. This is known as a short hedge . Steps to mitigate risk: Determine Quantity to Hedge: The trader plans to sell 22,000 kgs of rice. Determine Number of Contracts: Contract size is 1,000 kg. So, the trader needs to sell 22,000 kg / 1,000 kg/contract = 22 futures contracts. Execute Futures Sale: The trader should sell 22 futures contracts at the current future price of ₹59 per kg. This locks in a selling price for his rice, effectively guaranteeing him ₹59 per kg for his 22,000 kgs of rice, regardless of how low the spot price falls in 3 months. By doing this, the trader ensures a realized price of ₹59 per kg, protecting himself from the expected price fall to ₹56 per kg.