Examples

The whole unit on one sheet: the same short-hedge and long-hedge logic carried across grains, livestock, metals, energy, Treasuries, currencies, and stock indices.

What Framework Applies to Every Market?

• Net price = initial futures price + ending basis in every market. Only the underlying and how the basis is quoted change; the arithmetic does not.
• Natural short hedger (seller): already owns or will produce the commodity and fears a price decline, so it sells futures.
• Natural long hedger (buyer): will need to buy later and fears a price rise, so it buys futures.
• A financial hedger protects a rate or a price level, not a stored commodity: a bond-portfolio manager and a stock-fund manager hedge interest-rate risk and broad equity-price risk.

Which Markets Deliver the Physical?

• Grains, livestock (live cattle), softs, metals, energy, lumber deliver the physical commodity; grains deliver a warehouse receipt.
• T-Note and T-Bond futures deliver an eligible Treasury from a delivery basket; the short chooses the cheapest-to-deliver (CTD) issue.
• T-bill futures deliver a 90-day Treasury bill. Currency futures exchange the actual currencies on the delivery date.
• These markets have a true cash-versus-futures basis that narrows toward zero as delivery nears (convergence), including transportation and grade adjustments.

Which Markets Settle in Cash?

• Lean hogs, feeder cattle, 3-month SOFR, municipal bond index futures, and stock indices settle in cash to a reference index or rate. Nothing is ever delivered.
• A basis still exists (the gap between a hedger's own portfolio or rate and the index), but it tracks an index, not a store-and-deliver spot.
• Some commodities mix both settlement types: live cattle delivers physically but lean hogs and feeder cattle are cash-settled; the deliverable lumber contract is physical but the Southern Yellow Pine (SYP) contract is cash-settled; the headline West Texas Intermediate (WTI) crude and Henry Hub natural gas contracts are physical, but cash-settled financial variants of the same size also trade.

Which Numbers Matter Most?

Which Gotchas Trip Students Up?

Exam Tip: Gotchas

• A stock-index short hedger already owns the stocks. A fund manager hedging a portfolio against a decline sells index futures even while long the actual shares. "Short" refers to the futures leg, the same as in every commodity market.
• Cash-settled markets never deliver the underlying. An answer claiming a stock-index or SOFR hedger takes or makes delivery is wrong; there is nothing to deliver.
• The short picks the cheapest-to-deliver Treasury, not the long. Do not assume every agricultural or energy contract is physically delivered just because its headline contract is; lean hogs, feeder cattle, and the SYP lumber contract are cash-settled.
• 3-month SOFR settles to a rate; the older T-bill contract physically delivers a bill. Both hedge short-term interest-rate risk, but pair the settlement method with the right contract.

One-Breath Recap

The same framework runs every market in this catalog: net price equals the initial futures price plus the ending basis, and the hedger direction is set by the future cash transaction, never by the market. A natural short hedger already owns or will produce the commodity, fears a price decline, and sells futures; a natural long hedger will buy later, fears a price rise, and buys futures. Grains, livestock, softs, metals, energy, lumber, Treasuries, and currencies can involve physical delivery, with the short choosing the cheapest-to-deliver Treasury issue, while lean hogs, feeder cattle, 3-month SOFR, municipals, and stock indices settle in cash to an index. A financial hedger is protecting a rate or price level, not a warehoused good.

Need more than the recap? Read the full Examples unit.