When dealing with large volumes of material, price changes can affect the buyer and seller in a negative manner.
Hedging is a strategy designed to minimise exposure to an unwanted business risk, while still allowing the business to profit from investment activity. Hedging transfers risk by taking the opposite position in the underlying asset. For example, a commodity provider and a commodity user can enter into a futures contract to exchange cash for the commodity in the future. Both parties have reduced a future risk. The provider has removed the uncertainty of the price. The user has ensured the availability of the commodity.
When marketing mining products, hedging involves operations in the relevant commodity markets (for example, copper, gold, silver, coal). These hedging operations reduce the risk associated with unknown prices. That is, prices are determined by a quotation on the relevant commodity market at a predefined quotation period (QP), and not at the time the contract is signed, or the material is despatched.
Hedging can also reduce the risk of currency exchange rate fluctuations. Hedging operations in foreign exchange (FX) markets lock in a known exchange rate between currencies for a future transaction.
Despite its benefits, hedging carries risks and challenges. Poorly structured hedges or speculative strategies can lead to significant financial losses. Mining companies must carefully design their hedging programs to align with production plans and market conditions while avoiding overcommitment or unnecessary complexity.
Source: https://docs.dataminesoftware.com/MineMarket/Latest/G-CTRM/03-Hedging/Hedging.html
