NISM Series XVI - Commodity Derivatives Exam Notes
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In Agri markets, the backwardation is a common phenomenon due to Longer staggered delivery periods or Seasonal arrivals of crops.
Long hedge is associated with Long in Futures and selling in spot. Thus Long hedgers benefit by weakening of Basis i.e., Future price going up and Spot price coming down. Generally, Long hedge happens for raw materials by processors.
Short hedge is associated with Short in Futures against spot buying position or against yet to be manufactured stocks. Thus, while Short hedge happens with finished goods by processors / manufacturers. Short hedgers benefit with strengthening of basis i.e. spot price going up and Futures price falling.
Contango market -> Strengthening of basis -> Benefits short hedger
Contango market -> Weakening of basis -> Benefits long hedger
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