Reading a book where author uses "Effective price" term. After googling it found this:
The effective price is the price at which a commodity is sold or bought after the hedge has been lifted (liquidated). It can be calculated either by adding/substracting the basis change to the original cash price, or by adding/substracting the hedge of the futures (the original futures price at the time the hedge was placed minus the futures price at the time the hedged was lifted) to the final cash price.
Author calculates it using Spot price after at the end of hedge + difference of futures (example about futures hedging) prices F1 - F2, where F1 - futures price at the start of hedging and F2 - at the end.
I understand effective price as price of the asset with which you would have the same profit/loss buying/selling this asset on the Spot market, as buying/selling it on Futures market with difference F1 - F2, is it right?
P.S. What is unclear for me is price at which a commodity is sold or bought after the hedge has been lifted (liquidated). What does lifted (liquidated) mean and why should it affect the price?
We will assume that a hedge is put in place at time t1 and closed out at time t2. As an example, we will consider the case where the spot and futures prices at the time the hedge is initiated are $2.50 and $2.20, respectively, and that at the time the hedge is closed out they are $2.00 and $1.90, respectively. This means that S1 = 2.50, F1 = 2.20, S2 = 2.00, and F2 = 1.90. (Where S1 - spot price at t1, S2 spot price at t2, F1 and F2 the same).
Consider first the situation of a hedger who knows that the asset will be sold at time t2 and takes a short futures position at time t1. The price realized for the asset is S2 and the profit on the futures position is F1 - F2. The effective price that is obtained for the asset with hedging is therefore S2 + F1 - F2 = F1 + b2. In our example, this is $2.30