I am wondering if someone can explain to me eli5 how is hedging working and if traders hedge 100% of their physical deliveries at once.
Hypothetical scenarios is as following
buy legtrader agree buy physical 1000 BBL of crude @ mkt price -$1 = i.e. $65.00 – $1 = 64$ FOB and open short/sells contract for 1000 BBL crude @ market price i.e. $65.00
Note: trader agree to sell physical 1000 BBL of crude @ mkt price + 4$ delivery DAT in 2 months
sales legin two months trader sell psychical 1000 BBL of crude @ mkt price + $4= at the time of delivery the price is $63 + $4 = $67 at the same time trader close previously opened futures contract by going long/buying 1000 BBL crude @ market price $63
I am wondering if above described case represents more or less correct framework how traders hedge their physical positions, but what will happen if trader i.e. agrees to buy 6000 MT of X but get monthly deliveries i.e. first week 1000 MT of X in the next week 2000 MT then 1000 MT again and in the last week 2000 MT? Do traders hedge i.e. full amount 6000 MT at once or on a weekly basis when the material is arriving? I.e. on first week you hedge only 16% of total tonnage @ mkt price and then each the quantity you are getting ? Also what happen if trader agree to buy 6000 MT, hedge full 6000 MT but sell only 2000 MT in 2 month ? Trader unwind the 2000 MT and leave 4000 MT hedged and keep rolling these hedged tons ?