Derivatives and Hedging
In October 2011, MF Global Holdings LTD, a New York City brokerage company, filed for bankruptcy. Almost a billion dollars was missing from customer accounts that were supposed to be segregated from MF Global's trading accounts. Thousands of U.S. farmers collectively lost millions in their trading accounts at MF Global. This note explains the risks many businesses face including unknowable future material prices, interest rates, and currency exchange rates and how derivative securities are often used to hedge or protect against these risks.