Hedger in future market | Commodity

CFA Level II Alternative Investments
#1

Reading 42 of CFAI says below in Market Participants section

"If an existing or expected cash position is compensated for via an opposite future, the market participant is classified as a hedger"

Can someone share an example around what CFAI is trying to say here. This compenstation on expected cash position is not very clear to me.

Thanks,

Ishwar Jindal

#2

I live in Paris and I am expecting $1,000,000 next month for a painting I sold in the USA. My living costs are in EUR, I don’t want to hold USD. What if the USD depreciates in value by that time?

I talked to my futures broker, he said to sell one-month dollar futures for a price of $1,000,000. This way next month I will receive $1.000.000 and immediately pass this onto someone else. So a cash flow was compensated by an opposite position in a forward contract.

#3

Thanks Kroko