 Hey guys, it's MJ the student act tree and in this video. I want to talk about hedging risk discount Now the reason why I want to talk about it is because if you had to tap in hedging risk discount into Google It's quite difficult to find anything on this So I thought why not make a quick little video seeing that Google hasn't hasn't got it in its web yet So hedging risk discount, where do they come from? Well, I think the best way to explain it is With a little bit of an example or something that has hedging risk discount and that is something known as commodity futures Okay commodity futures. It's a risk mitigation Financial device which basically locks in the future locks the pricing of a commodity in the future For instance, let's say you have two parties, okay Let's call this one the producer and this one the consumer and The producer is producing some sort of commodity can be gold. It can be whatever and They need to sell out in the future. So they only want to buy the by the product Let's say tomorrow, okay? So they want to buy tomorrow or in a couple of weeks time sometime in the future And they want to lock in the price now so the price is say 10 Rand now, but tomorrow the price could go up and it could go down What the producer and the consumer can do is that they can agree that tomorrow? We're gonna buy the gold for 10 Rand So if the price drops The producer can still get it can still sell it at 10 Rand And if the price rises the consumer can still buy at 10 Rand So we've mitigated both of their risks the risk of selling and the risk of buying So that is something that we're all familiar with that's commodity futures producers and consumers Setting a price in the future for a specific commodity So what is hedging risk discount? well Apparently and I'm saying this apparently because there's not a lot of theory around this hedging risk discount This is kind of like a new a new thing and we've seen that like it's not really well documented on Google or Investopedia is that Apparently the consumer so this guy over here is Regarded as less willing to commit to a future purchase than the seller Then this results in a hedging risk discount that is built into the future price So what this means is that this guy? The deal to him or this risk of buying is less than the risk of selling. So let's actually draw that out so the risk of selling is greater than the risk of Buying Now why is that the case? Why is the risk of selling a bigger risk than the risk of buying? Well, it's because who has the gold The producer has the gold and they've already You know put the costs in In retrieving the gold so they've already you know have they've got these sunk costs They already have paid their expenses. They've paid their miners Everything's already been paid and now they have this gold that they need to sell in order to help them out with their liquidity position So that's another key thing is the liquidity Position of the buyer is better than that of the seller. So maybe let me write that yeah, so liquidity of seller is less than the liquidity of The buyer and So what this does is it gives the consumer a bit of an advantage a bit of an advantage in this deal this deal That is supposed to be you know this risk mitigation of trading buying risk for selling risk and they offset each other That's not necessarily the case Because the risk of selling is greater and you know the liquidity risk is Worse so the consumer just like how we say customer is king the customer in these future deals are also a bit of a king and Therefore the futures contract is more valuable to the seller and So in order to entice the consumer to engage in this community future hedging risk discount is applied, which means the consumer is getting a slightly better deal but let me just Say that this is This is like futuristic finance I don't think it's in a lot of textbooks yet. It is you know Things that we're still discovering So don't quote me in an exam But it is an interesting thing to To think about that the risk of the buyer and the seller are not the same Which is what traditional finance has always sold us anyway I'm MJ the student actually and thank you so much for watching this video. Cheers