What is a base rate?

July 1, 2010, was a significant date for banks and borrowers. That was the day when the new regime for benchmarking home loans – the base rate system – came into being. Now, interest rates on all loans extended post July 1 are linked to the new system.

The new system was introduced by the Reserve Bank of India (RBI) in response to complaints from home loan borrowers of the partisan approach adopted by banks while raising home loan rates. Banks were accused of making attempts to entice new borrowers with lower rates even as the benefits of a benign interest regime were sparingly passed on to existing borrowers. And in a hardening rate scenario, banks rarely hesitated to increase rates for old borrowers . The base rate system was put in place with the objective of enhancing transparency in loan pricing and ensuring fair treatment to all borrowers. Now, banks are required to review their base rates at least once every quarter and ensure that any changes made are passed on to all classes of borrowers.

After the RBI raised its key policy rates in its quarterly monetary policy review on January 25, 2011 several banks have taken the cue and hiked their respective base rate as well as benchmark prime lending rate (BPLR). Borrowers whose loans are currently linked to PLR can take a call on moving to base rate and the bank cannot charge any fee for effecting the transfer. While it is yet to be seen if the new benchmark will indeed benefit old borrowers, many are of the opinion that switching over would certainly result in noticeable gains. For the purpose, you need to get in touch with your bank and inform them that you intend to adopt the new system. There is no standard format prescribed for making the switch. Your bank, though, may ask you to submit the relevant application form or a letter stating your intent. Once you accept the new terms, the bank will have to facilitate the transition.

If you are one of those whose home loan continues to be linked to PLR, you would do well to analyse your current situation before switching to the base rate. For instance, if you are very close to clearing the entire loan, say a year from repaying the entire amount, you need to compare the present home loan rates – the one benchmarked to the base rate as well as the one linked to the PLR. If the latter is lower, you can look at continuing with it. However, if the last instalment due is several years away, you should definitely consider making the switch, even if the PLRlinked rate is lower than the one tied to the base rate. This is simply because the latter is a more transparent mechanism and is likely to reflect changes in the interest rate environment effectively. Lastly, if you have taken a home loan under the ‘teaser’ or ‘special’ home loan schemes that were in vogue till recently , you needn’t take any action at all. Once the fixed-rate period expires, your new rate will be automatically linked to the bank’s base rate then.

Monthly Income - Post Office/Mutual Fund

The post office's monthly income scheme (PO MIS) and the monthly income plans (MIPs) sponsored by mutual funds both offer monthly returns. But which one is better? The government-sponsored PO MIS gives an assured return of 8% payable monthly plus a maturity bonus of 5%, while MIPs offer better liquidity and also returns by deploying 5% to 25% of total assets in equity and the rest in debt products.


What are Monthly Income Plan (MIP) and Monthly Income Scheme (MIS)


Monthly income plans (MIPs) are hybrid mutual fund that invests about 80% to 100% in debt and the rest in equity. The returns are not guaranteed.

The returns of the monthly income scheme from post office are guaranteed by the government of India.

About MIS

MIS assures a return of 8%, plus a maturity bonus of 5% after tenure of six years. The post office website claims that if the monthly interest payments are invested simultaneously in the post office-sponsored recurring deposit scheme (it earns an interest of 7.5% compounded quarterly), the effective yield comes to 10.5%. However, a closure scrutiny suggests this is a marketing gimmick; the effective return on maturity proceeds, inclusive of the bonus amount, turns out to be 8.77%. Also, the interest income is taxable at the hands of investors. So, the yield reduces further. Let us suppose you invested 1,20,000 in MIS where the monthly interest components of 800 are invested in the recurring deposit (RD) scheme, which returns 7.5%, compounded quarterly. So, the RD's maturity amount comes to about 72,806. This, along with the bonus amount of 6,000 (5% of 1,20,000), plus the principal component (a total sum of 1,98,806), gives an effective yield of 8.77%.

About MIP

The MIP also resorts to a marketing gimmick. A monthly income plan would suggest that the schemes offer some returns every month. However, the monthly dividends from such schemes are not guaranteed. Dividends are subject to the availability of distributable surplus and it is solely at the discretion of the fund house. So, if the market goes through volatile times or nosedives for a long period, no dividend may be declared. As MIPs invest 15-20 % in equities, they are subject to market risks. Nonetheless, a good fund manager manages the MIP in an effective manner and takes calculated risks to give steady returns.Inflation

Inflation has always affected the investment continuously eating into our returns. Hence, all investors look for a product that generates alpha over the inflation rate. In the current burgeoning inflation rate scenario, returns do matter. If it comes at a little additional risk, so be it. Senior citizens or persons looking for a fixed monthly return can consider investing in steady performing MIPs with a good track record of doling out monthly tax-free dividends. Ideally, investors looking at monthly payout MIPs for a longer period should invest at ex-dividend NAV on any particular month so that they get more units. As a result, the monthly payouts, ie, monthly dividend yields they get would be high. If monthly dividends are not required, an investor can choose the growth option.

Taxation

The monthly dividends from MIPs are subject to a dividend distribution tax of 13.84% for individuals; however, if you sell the units within a year, the gain, if any, would be subject to your personal income tax slab. If you sell units after a year, a 10% long-term capital gain tax or 20% with indexation would be levied. The interest income on PO's MIS would be subject to your personal income tax slab; so, the 8% fixed return no longer applies here.

7 financial planning tips for couples

Money is one of the biggest discord among newlyweds, especially in big cities. Problem of spending and investing as 'I' among married couples instead of 'We' is one of biggest problem behind poor investment decisions. It basically arises from lack of communication. Most people don't communicate their investment decisions to family members due to oversight or procrastination.




In addition, individualism too is creeping into personal finance these days and couples are steadfastly refusing to share their financial information with each other. It's unbelievable but true. If I earn, I have all right to decide where I spend (forget about investments) is the reasoning.

Sharing salary details, annual bonus, credit card limits with partner is an absolute no-no. For them, it's giving other person space in money matters. In a nutshell, ignorance is bliss when it comes to each other's finances.

Notion of individualism and financial independence could defeat the very purpose of sound financial planning. If one doesn't know what other is doing with the money it can be disastrous. Hiding some huge debt is also sometimes one of reasons not to share financial information with partner. But they often forget that one needs to find solution to the problem and not to aggravate it.

In addition, it is significant to come to terms with financial reality after marriage. Single income can convert to double, but so can debts; buying assets may become easier, but insurance liability could increase; your spending or savings habits could be disastrous mismatch, but your long term goals may be same.

In some cases, money can be reason for all the marital discords.

1. Be open about your financial health and spending habits

Make sure you talk, discuss, debate, and communicate as regards planning your combined finances. Be it your income or expenses, savings or debts, liabilities or assets, habits or cravings -- talk about everything in detail. Talking not only helps meet your goals but also irons out misunderstandings and differences. Also it is significant in the context that it keeps both partners in the loop and in the absence of one spouse; the other is not left in the lurch.

Make sure you list out your debts such as car loan or credit card bills and assets like jewellery, real estate or stock investments. Do talk about your attitude towards money, your values, what you plan to do with it after marriage.

These inputs will act as building blocks for the new financial equation and make it easier to formulate goals and stick to a plan to achieve this. Make sure at the end of this activity, you have some idea about goals and approximate budget.

2. Do frame a budget, baseline the goals

In the absence of a budget, it will be impossible to keep tab on your spending which will have a domino effect on your savings and investments. A budget not only inculcates financial discipline and regulates your cash flow, but also makes it that much easy to meet your financial goals. Base lining the goals can be next logical step.


Frame your long and short term goals in accordance with your priorities and earning capacities. Do establish an approximate timeframe for each goal -- it can be buying furniture, car or a house. Also you can talk about financial implications post birth of child, savings required for his/her education and marriage, vacations and of course retirement. It's never too early to start planning and saving for such goals as compounding effect of investments works in your favour.


To ensure fulfillment of objectives, it is critical to make a budget. Start with bigger expenses like home loan EMIs, house rent or insurance premiums and go on to smaller ones such as grocery, utility or credit card bills. A budget that includes tracking your spending is the only way to know where your money is going. It will make sure that that if you need to save more to achieve your goals, you cut down on your spending

3. Work out implementation strategy

This is the most significant aspect of financial management for newlyweds. Should one merge the finances? Who will make sure plan is on track? This depends on how couples want to plan it out.

Though one can retain their individual accounts to manage individual expenses, a joint account for household expenses, including grocery or utility bills. There is a flexibility to operate in case of each other's absence. Bottom line is that the couple should be comfortable managing their finances.

Even if one partner is financially savvy, it doesn't mean other one should remain in dark. Both the members should be aware of their investment avenues, savings and expenses, modes of transaction, passwords, due dates for premiums, bills etc. This ensures that in case of eventuality, you are not clue less about your expenses.

4. Evaluate your insurance needs

Before marriage and without dependents, an individual can do with relatively small insurance cover than after marriage, especially if you are sole earning member of the family. So a term life insurance is critical. Your cover should be enough to pay out your outstanding loans so that your spouse isn't burdened by it. Ideally you should have 10 times your annual income as life cover.

Upgrading your health insurance is also significant. Even if you are insured by your employer, it is advisable to buy a separate policy. On an average a combined cover of Rs 5 lakh for a couple will be an ideal one but again it depends on other numerous factors.

5. Know about taxation benefits

As a married couple, one is eligible for high home loan and both can claim tax deduction on repayment. A joint home loan offers a benefit of Rs 1 lakh each under Section 80c of Income Tax Act (for repaying the principal) and additional Rs 1.5 lakh each on the interest repayment under Section 26.


6. Take care of documentation changes

If you go for a name change after marriage, ensure you indulge in necessary paperwork. One of most crucial alterations involving name change is PAN card change, besides passport, KYC, bank account etc. Adding wife's name in all existing insurance policies and investments won't be a bad idea.

7. Put emergency fund in place


Life comes with no guarantees. So even if both are earning well, it doesn't mean you cannot be waylaid by an accident or an illness. Be prepared for such eventualities and start saving for emergency fund, which should at least stash at least 3 to 6 months worth of expenses.


In a nutshell, working towards a common goal can make things so much easier for you and your partner. 1+1 = 3 remember. Make a consolidated record of investments of you and your wife so far. For instance, every time your SIP is executed make that entry in the file. Details of insurance policies -- amount of life cover, tenure, premium and policy numbers, fixed deposits, PPF deposits, bonds, bank and demat account numbers should be clearly mentioned. Discuss your investments, loans, expenses, budgeting. Idea is to consolidate financial portfolio of both so as to complement each other's investments.

Consolidation basically leads to doing away with the duplication and sub-optimal use of investible surplus. Husband and wife can gain substantially when they combine their financial forces. They are able to manage debt better, buy a bigger life cover for themselves and most importantly have more investible surplus. Harmony in finances will definitely help spend better, yet invest more and avoid duplication.

Planning as 'we' is also significant as to be aware of investments made if one of them meets an untimely death. Though nothing can be more traumatic than loss of dear ones but there could be financial repercussions too if that person has solely handled all investments. Sometimes we tend to be disorganised with our investments as we think that nothing can happen to us.

So it's high time we understand the significance of 'we' so as to lead healthy financial life.



Source: Rediff

Textile Sector

Textile firms may not be immediately able to take advantage of the fall in cotton prices as most of them are under pressure to dispose off existing inventory bought at higher rates, said industry experts. In the past three months, cotton prices (Shankar-6 variety) have fallen by about 32%.

Currently, the Shankar-6 variety is trading at about Rs 114 per kg, according to Textile Corporation of India. The inventory pile up will force companies to extend end-of-sale period and give further discounts, experts said. Companies may increase discount to 50-60% from 30-40% in a bid to clear off their inventory. Thus, the June 2012 quarter would be a subdued one for textile companies with slow growth in sales and net profit.

Textile companies would be able to take optimum advantage of the fall in cotton prices only from the beginning of the December quarter, experts said.

Currently, there are about 25-30 lakh bales of cotton in the country. Forward prices of cotton are lower than spot rates on NYMEX, an indication of further fall in prices. Also, crop size of cotton this season is bigger than the previous season. There is a difference of 20% in spot and forward prices of cotton on NYMEX.
 
These factors indicate that there is still scope for further decline in cotton prices in the coming months. While a few companies, which have three to four months of order book, are accumulating cotton prices at the current market prices, most companies, especially fabric and garment manufacturers are grappling with overstock situation.


This is the right time for investors buy into textile stocks, experts said. Once demand picks up from the beginning of the December quarter, orders would be placed from buyers (fabric and garment manufacturers) to suppliers (spinning and trading firms). This would generate overall interest across the stocks of textile companies.

Source - Economic Times

FMCG Sector

Indian fast moving consumer goods (FMCG) companies are expected to report a slight reversal in trend during the June 2011 quarter, with moderation in sales growth and stable margins, thanks to price hikes.

Sales of 13 major companies in the sector, at Rs 24,163 crore, are expected to see a strong 17% year-on-year (y-o-y) growth in the June 2011 quarter (Q1FY12), though the growth rate would be lower compared to earlier quarters as price hikes (a wide range of 5-35%) affect the volume growth of companies such as Marico (coconut oil) and Godrej Consumer Products (soaps).

Sales Growth

The top five players (by expected sales in Q1FY12), including ITC, Hindustan Unilever (HUL), Asian Paints, Nestle India and Titan Industries that constitute nearly 70% of total revenues, are expected to report a sales growth of 15.4%.

ITC is expected to report a recovery in cigarettes’ volume growth (5-8%) in the absence of a price hike as excise duties were left unchanged in the Union Budget 2011-2012, strong traction in non-cigarettes FMCG business and a rebound in hotels business. HUL’s soaps and detergents will benefit from price hikes, while strong traction will continue in its personal care and foods business.

Asian Paints’ expected growth rate of 13% is disappointing compared to earlier quarters, given that the company had executed steep price hikes in past few quarters. However, Nestle and Titan are likely to continue their strong growth momentum, with 21% and 26% jump in revenues respectively, as they benefit from low penetration and strong demographics.

On the other hand, Godrej Consumer Products and Dabur are expected to record the highest growth of 46.5% and 28.4% respectively in this sector aided by the contribution of acquired companies. Tata Global Beverages, however, is expected to lag with a single-digit growth of 6.5%, followed by Colgate and GlaxoSmithKline Consumer Healthcare at 10-15%.

Margins

Most FMCG companies had been facing margin pressure since the past few quarters on the back of rising raw material prices and intense competition that limited price hikes that came in lower than escalation in costs.

However, the situation is expected to change in Q1FY12 as companies benefit from earlier price hikes and stable raw material prices. Also, companies resorted to a reduction in advertising expenditure (as percentage to sales) in order to compensate surge in raw material costs.

Consequently, the operating profit margin (OPM) is expected to remain intact at 19.5% (aggregate). However, excluding ITC, the OPM is likely to dip marginally by 17 basis points (bps), largely due to a 100bps fall in HUL’s OPM, followed by 91bps in case of Asian Paints. Net profit margin is expected to improve marginally by about 50 bps to 13.5%.

 
Double Bonanza


Going ahead, the FMCG companies will continue to ride on the consumption wave in India. Sales growth will remain robust, backed by strong volumes in rural areas, new launches, increased penetration of products (such as noodles and personal care) and inorganic opportunities.

Margins are expected to improve further due to recent price hikes, near normal monsoon resulting in benign agri-based input prices and softening crude oil based/linked commodity costs.

The prices of palm oil, sugar, wheat, LAB (linear alkyl benzene) and HDPE (High-Density Polyethylene) have already started softening. But many companies have shown reluctance in passing on the benefits of a reduction in input prices as they suffered in an inflationary environment.

Steep Valuation

The sector is trading at a peak valuation of around 29 times post the significant run-up in stock prices, outperformance over Sensex since March 2011 on expectations of good monsoons and softening trend in input costs. The BSE FMCG index touched an all-time high level of 4107 on July 8

ETFs

What are ETFs


ETFs are passively managed schemes that invest their entire corpus in a basket of securities, such as equity shares. They are not meant to outperform their benchmark indices; they are supposed to track it passively. Since fund managers are not involved in managing these funds—they work on an automated mechanism—these funds are meant for those who like to avoid the fund manager’s risk. However, unlike index funds (also passively managed) that work like any other MF scheme and buys and sell securities from the stock exchange, ETFs have a different mechanism.


The fund house appoints market makers in the stock market who buy the basket of securities (such as all the scrips of the market index on which, say, an equity-oriented ETF is based upon) and hand it over to the fund house, in exchange of a certain number of units. This process is called unit creation, whereby ETF units are “created” in exchange of a basket of securities. The market maker then breaks up these units and sells them separately on the stock exchange. Investors can then buy and sell these units from the stock exchange.


For instance, according to the offer document of Benchmark Nifty BeES, India’s first ETF, you need to “create” a minimum lot of 10,000 Benchmark Nifty BeES units, at any point in time. At Thursday’s value, the total cost of this basket comes to about Rs. 55 lakh (10,000 units multiplied by Rs. 550 or one-tenth of Nifty’s value as on 24 March). This basket will contain all the 50 Nifty shares in exactly the same proportion as they lie in the Nifty, plus a small amount of cash, as mentioned in the scheme’s offer document. When the market-maker wants to redeem these units with the fund house, it does not get cash in return. It gets the basket of securities back.


Why are ETFs superior to index funds…

Since a passive fund, such as an index fund or ETF, tracks the market passively, you would expect it to give the same returns as that of its benchmark index. In reality, they don’t. The difference, called the tracking error, is caused because of the cash component that an index funds holds, and also when the fund manager buys and sells the stocks (to align with the underlying index) and pays brokerage on them. The fund’s expense ratio (they can charge a maximum of 1.5% a year) also adds to the tracking error.

But here’s why an ETF’s structure is superior to that of the index fund. Though your index fund manager is typically mandated to hold at least 90-95% of the portfolio in equities (and the rest in cash), there have been instances when your fund manager has held more cash. Inevitably, your fund manager has the power and control to change your scheme’s asset allocation. This is also mainly why Krishnamurthy Vijayan, chief executive officer, IDBI Asset Management Co. Ltd that manages only index funds, said that he recruited ex-dealers and not ex-fund managers to take care of index funds at his MF.

However, an ETF fund manager does not have these powers. Since the ETF units can be created or dissolved only against a basket of shares, the cash component remains the same throughout. Also, the onus to create units—as against the basket of securities—is on the market-maker, so the ETF does not really buy or sell securities in the market. Hence they don’t pay brokerage to stock brokers.

…and closed-end funds

ETFs also do not suffer from the pangs of closed-end funds where the listed market price is generally lower than the scheme’s net asset value (NAV). An ETF’s market price and NAV almost moves in tandem. If one goes up, it provides an arbitrage opportunity to the market maker to move money (either on the Nifty BeES units or the basket) and this arbitrage forces the prices to converge. For instance, on 24 March, the Nifty closed at 5522.4. Nifty BeES’ NAV was Rs. 557.83 and its closing market price was Rs. 559.69. Such a difference, if happens during market trading hours) provide an opportunity to market makers to make some money.

In this particular case, the market maker will sell Nifty BeES in the market since it is quoting at a higher price in the market (Rs. 559.69) and replenish his stock by buying the ETF units from Benchmark AMC at the actual NAV (Rs. 557.83) . The market maker’s selling in the market will create a downward pressure on the market price of the ETF units and he will continue to indulge in this arbitrage till the time the market price of the ETF units doesn’t converge to the actual NAV. Some difference will remain, however, on account of transaction costs.


Are ETFs liquid enough?

Since only large investors, such as market markers whom the fund house appoints, can “create” and “redeem” units with the fund house, your only chance to buy and sell ETFs is on the stock exchange. Hence, liquidity is important. Some ETFs, like those typically from Benchmark AMC, enjoy good liquidity. For instance, the average trading volume of Benchmark Nifty BeES was 113,000 units a day so far in 2011, 89,463 units in 2010, 145,000 units in 2009 and 72,018 units in 2008.

However, not all ETFs enjoy good liquidity. Sensex Prudential ICICI Exchange-Traded Fund (SPICE), for example, has consistently suffered from poor liquidity. Only 81, 151 and 207 units were traded on average in 2008, 2009 and 2010, respectively. On 119 of 252 trading days in 2010, not a single SPICE unit was traded. On 46 days, less than 20 units were traded. “Since actively managed funds have outperformed ETFs, we have not been able to give much attention to SPICE. In India, fund managers have managed to outperform benchmark indices, as against the developed markets. Even ICICI Prudential AMC’s actively managed funds have done much better than our own passive funds”, says S. Naren, chief investment officer -equity, ICICI Prudential Asset Management Co. Ltd.

Most ETFs offer an additional window for redemption if their units are not traded consistently on the stock market. For instance, SPICE’s offer document says that if units are not traded on the stock exchange (Bombay Stock Exchange) for five days, investors can redeem their units with the fund house directly. Naren claims that a majority of SPICE’s investors have chosen to not to use this window for redemption. Liquidity for gold ETFs has been much better. Throughout 2010, at least 90 units of gold ETF across fund houses were traded on a single day.


Fighting for shelf space

Though India’s first ETF house got sold out, market experts believe that this is not necessarily a bad sign for passively managed funds in India. As per the ETF landscape report released by BlackRock Inc., an US-based asset management company—and the owners of iShares ETFs (world’s largest ETF provider in terms of number of products and assets under management with a 44.1% market share)—ETFs have grown by 33.2%, compounded annually, globally in the past 10 years and 26.1% in the past five years.

In the US, MFs witnessed a net redemption (more money went out than came in) of $278.3 billion, against a net sales (more money came in than went out) of $85.9 billion during the first 10 months on 2010. With the US ETF industry having crossed the $1 trillion mark on 16 December 2010 (it took the industry 18 years to reach this milestone), the US MF industry (excluding ETFs), took 16 years to reach the $1 trillion mark.

Sadly, ETFs haven’t really taken off in India so far. According to the Association of Mutual Funds of India (Amfi) data, ETFs comprise of only 0.3% of the total industry assets. In comparison, ETFs comprise about 9% of the MF industry in the US. Why haven’t ETFs taken off then? Says Sanjiv Shah, executive director, Benchmark AMC: “Agents have traditionally sold products that fetched higher commission. ETFs are low-cost products and hence don’t pay much commission. Hence the market did not take off as much as we had anticipated.” Adds Ambareesh Baliga, chief operating officer, Way2Wealth, a broking firm: “ETFs are not a paying proposition.”

But that is not the only reason why ETFs did not pick up. Contrary to developed markets such as the US where fund managers have repeatedly found it tough to beat indices, in India actively managed funds have outperformed passive funds, consistently. “There is immense talent in the Indian MF industry. We have more than 6,000 listed companies on our stock markets; it’s not very tough for a capable fund manager to pick about 100-150 stocks of these that can outshine the market”, says Jaydeep Kashikar, director, Brainpoint Investment Centre Ltd, a Mumbai-based financial planning firm.

Ajit Dayal, director, Quantum Asset Management Co. Ltd, says that ETFs in India are “bad products” because Indian stock market indices see frequent churn of indices going in and out. “Such churn forces the fund manager to sell the scrip that moves out of the index and buy the scrips that enters the index”, he adds. Here, the ETF fund manager himself rebalances the portfolio; the scheme bears the cost. In the past three years while Sensex has changed three, two and three scrips, respectively, BSE 100 has changed 12, two, 11 scrips and the Nifty has changed three, five and four scrips, respectively. “The BSE 30 or NSE Nifty are quite suspect as indices. Some of the people who look after indices are fund managers. They change stocks in the index to the extent of 20% every year. Where is the stability of the index?”

Not all agree with Dayal though. Reid Steadman, global head of ETF licensing, Standard and Poor (S&P) Index Services, says that though NSE indices are maintained independently, “they are in line with global best practices”. India Index Services and Products Ltd (IISL)—that maintains and manages indices for NSE—has a licensing agreement with S&P for co-branding certain indices such as S&P CNX Nifty.

Benchmark’s acquisition hasn’t deterred others from launching ETFs and index funds. India Infoline Asset Management Co. Ltd, that got its MF licence recently, aims to launch passive funds initially and manage them for about a year. Motilal Oswal Asset Management Co. Ltd that started its operations last year also aims to stick to ETFs, as will IDBI Asset Management Co. Ltd that will mainly focus on index funds.

Naren of ICICI Prudential AMC says that they have no plans to wind up the scheme for now. Instead, he adds, the fund house may get aggressive and apart from educating stock brokers to recommend ETFs to investors who need them, will also look at launching specialized ETFs such as country-specific ETFs.

“While the MF industry works on a distribution model, ETFs are sold by stock brokers, not distributors who find more potential in their earnings in selling equity stocks to customers and getting them to churn. It will take time to educate brokers on ETF’s benefits”, says Naren.

Source: Livemint

Forward Contract

Forwards and futures contracts are a special type of derivative contract. Forward contracts were initially developed in agricultural markets. For example an orange grower faces considerable price risk because they do not know at what price their crops will sell. This may be a consequence of weather conditions (frost) that will a ect aggregate supply. The farmer can insure or hedge against this price risk by selling the crop forward on the forward orange concentrate market. This obligates the grower to deliver a speci c quantity of orange concentrate at a speci c date for a speci ed price. The delivery and the payment occur only at the forward date and no money changes hands initially. Farmers can, in this way, eliminate the price risk and be sure of the price they will get for their crop. An investor might also engage in such a forward contract. For an example an investor might sell orange concentrate forward for delivery in March at 120. If the price turns out to be 100, the investor buys at 100 and delivers at 120 making a pro t of 20. If the weather was bad and the price in March is 150, the investor must buy at 150 to ful ll her obligation to supply at 120, making a loss of 30 on each unit sold. The farmer is said to be a hedger as selling the orange concentrate forward reduces the farmer's risk. The investor on the other hand is taking a position in anticipation of his beliefs about the weather and is said to be a speculator. This terminology is standard but can be misleading. The farmer who does not hedge their price risk is really taking a speculative position and it is di cult to make a hard and fast distinction between the two types of traders.