19.6 Risks in using futures contracts for hedging As shown in some of the hedging strategies in Section l9.S, it is often not posible to hedge a risk LEARNING exposure perfectly. The underlying objective of managing risk using derivative products is to lock in OBJECTIVE a price today that wil apply at a specified later date. lf a risk manager can lock in a price today that 19.6 exactly matches the current price in the physical market, then a perfect hedge has been achieved. ldentify risks associated with using a futures However, this is generaly not possible. Risk managers must gain a complete understanding of the risk contract hedging management products and strategies that are available, and the implications of using different products strategy, including standard contract size, and strategies. Some of the important constraints in achieving a perfect hedge when using fiutures margin payments contracts to hedge risk include: basis risk and cross- commodity hedging standard contract size emargin pavments basis risk cross-commodity hedging 19.6.1 STANDARD CONTRACT SIZE The first potential constraint in using fiutures contracts to hedge a risk exposure is caused by the standard size of a futures contract. With an exchange traded contract it is not possible to change the contract specifications to meet nonstandard risk management needs. For example, Table 19.7 shows the standard contract size of selected financial futures contracts traded on ASX Trade24. Table 19.7 Selected