What is Price Risk Management/”Hedging?
Price Risk Management (PRM) is the act of offsetting price risks in assets or liabilities by using contracts of equal but opposite dimensions in time and price. Example: If you have a receivable of Japanese yen (JY) 1 Million due in 90 days you could minimize price risk by selling JY l million for forward delivery in 90 days with your bank or short a futures contract and cover it in 90 days with the receivables payment. If you plan to use 1 million gallons of heating oil in the next 90 days, you could buy a contract for forward delivery from a supplier at today’s price (plus time premium), or you could buy a futures contract.
