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Small Firms Look to Hedge Costs
A growing number of small-business owners are using devices like derivatives to protect themselves against risks they previously considered unavoidable, such as bad weather or soaring gas prices.
Derivatives come in many forms. Among the most common are futures contracts, which rise and fall in tandem with the value of commodities such as coffee, grain or oil. Futures on a wide range of commodities are traded on public exchanges. Another type of derivative, known as a forward contract, is a private agreement between two parties for the future purchase or sale of something at a predetermined price.
Using derivatives doesn’t mean the buyer gets a bargain. Instead, they mute the risk of volatile prices, which can wreak havoc on small businesses whose profits hinge largely on the costs of raw materials. But given their complexity and risks, these investments aren’t for everyone. Experts especially caution against inexperienced derivatives users gambling on swings in commodity prices or the weather.
“Hedging is still a sophisticated concept, but it’s percolating down to more and more people,” says Robert J. Shiller, a finance professor at Yale University in New Haven, Conn.
Photo by MSDesigns.
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ken on June 14th, 2007 5:19 am
financing method for small businesses always slow to adopt. I doubt this will pick up unless small & medium size financing have become more mature.
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