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Let’s learn more about Hedge Limits. To get a good sense of the liquidity available in the market, traders look at the ‘open interest’ of a commodity. Open interest is the number of outstanding contracts or open positions currently prevalent in the market. It may be long positions or short. It for a commodity may be availed by bona fide hedgers in addition to the normal position limit allowed to them. Such hedge limit shall be non-transferrable and shall be utilized only by the hedger to whom the limit has been granted and not by anyone else. Hedging is a strategy that tries to limit risks in financial assets. It is an important aspect of a commodity trader.
Hedge Limits and Hedger
A higher client-level open interest (OI) limits or ‘Hedge limits’ are permitted by the exchange to Hedgers. This is to help hedge their price risk of the current cash and expected future commodity requirement. It is subject to certain conditions and document requirements by the exchange.
A Hedge Policy has been introduced to benefit the Members or ‘constituents’ trading in their proprietary account who have justifiable reasons to hedge their positions due to their nature of business such as importing and exporting goods.
