A major application of derivatives is hedging, which is an activity of any kind aimed at reducing risk. The following example shows how a futures contract may be applied by a steelmill in order to reduce the risk of alling prices of ingots when the price of metal ore falls. For the sake of simplicity it is assumed that there is a direct relationship between the price of the ores and the prices of matallurgical products which are made out of them. In the upper part od the big tits at school diagram the owner of the steelmill calculated his profits based on steady prices.
