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  • National Commodities Futures Series 3 - Key Concepts

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    sam001040
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    This document provides an overview of hedging in commodities futures trading. It discusses how hedging is used to reduce risk from price fluctuations by entering offsetting transactions. Specifically, it describes long hedging where a buyer purchases futures contracts to lock in prices for future needs, and short hedging where a seller uses futures to guarantee a price for their inventory if prices decline. An example is given of each where a food processor long hedges corn needs, and a farming cooperative short hedges existing corn supplies. The key purpose of hedging is stabilization of prices rather than speculation.

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    hedging finance

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    Hedging - Series 3 - National Commodities Futures _ Investopedia

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    This document provides an overview of hedging in commodities futures trading. It discusses how hedging is used to reduce risk from price fluctuations by entering offsetting transactions. Specifically, it describes long hedging where a buyer purchases futures contracts to lock in prices for future needs, and short hedging where a seller uses futures to guarantee a price for their inventory if prices decline. An example is given of each where a food processor long hedges corn needs, and a farming cooperative short hedges existing corn supplies. The key purpose of hedging is stabilization of prices rather than speculation.

    Drepturi de autor:

    © All Rights Reserved
    Descărcați ca PDF, TXT sau citiți online pe Scribd
    Indicator pentru conținut neadecvat
    55 vizualizări2 pagini

    National Commodities Futures Series 3 - Key Concepts

    Încărcat de

    sam001040
    This document provides an overview of hedging in commodities futures trading. It discusses how hedging is used to reduce risk from price fluctuations by entering offsetting transactions. Specifically, it describes long hedging where a buyer purchases futures contracts to lock in prices for future needs, and short hedging where a seller uses futures to guarantee a price for their inventory if prices decline. An example is given of each where a food processor long hedges corn needs, and a farming cooperative short hedges existing corn supplies. The key purpose of hedging is stabilization of prices rather than speculation.

    Drepturi de autor:

    © All Rights Reserved
    Descărcați ca PDF, TXT sau citiți online pe Scribd
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    din 2

    Series 3 - National Commodities Futures

    Chapter13

    Chapter46

    Chapter79

    1.Preface

    3.6Hedging

    2.GettingStarted

    3.7Leverage

    3.GeneralTheory

    3.8GeneralFuturesTerminology

    AAA

    Chapter1011

    3.9GeneralOptionsTerminology
    3.10SummaryAndReview

    General Theory - Hedging


    Hedging
    Notallfuturestradingisaboutmovinggoodstomarket.Hedging,orenteringintoatransactioninordertoreduceexisting
    exposuretopricefluctuations,isalsoamajorcomponentoftradingvolume.
    SEE:ABeginner'sGuideToHedging
    RiskReduction
    Justaboutanytradercanbeahedgeratsomepointintimeitisafunctionmorethanajobdescription.Ifatraderalreadyholds
    thephysicalgoodsorthefuturescontractstodeliverthem,orelsehastheoffsettingshortposition,thenshemightactasahedger
    onhernexttrade.Hedgingisdonetodecreaserisk.
    Whenyoubuyafuturescontract,youagreetopayacertainpriceforagivenquantityofagood.Thecounterpartywhosellsthe
    contractisagreeingtothesameterms.However,overthemonthslongcourseofthecontract,circumstancesbeyondthecontrol
    ofeitherpartycanoccurthataffectthespotpriceonthedeliverydate,causingittovarywildlyfromthepriceanticipatedinthe
    contract.Whenthathappensandneitherthebuyernorsellerhashedgedpositions,thensomeoneisgoingtoendupwithawindfall
    andtheotherisgoingtobepayingforit.
    Hedging,then,hasastabilizingeffectoncommoditiespricing.
    LongHedging
    Inalonghedge,thehedgerbuysafuturescontract.Typically,thisisdonebysomeonewhoaddsvaluetothecommodity:
    processors,manufacturers,exportersoranyonewhoisgoingtoneedaknownquantityofacommodityatafairlyspecificpoint
    inthefuture.Thesetypesofenduserarecommercialhedgers.
    SupposealargesnackfoodcompanyknowsinJulythat,inSeptembertwomonthshence,itwillneed50,000bushelsofcornto
    keepitstortillachipfactoryrunning.TheCBOTreportsthefollowingpricesfor5,000bushelcontracts,denominatedin
    cents/bushel:
    Spot:235
    SEP:246
    DEC:260
    Domesticdemandforcornisgrowingatafairlyconstantratesupplycouldkeepup,butnewmarkets,unfavorableweatherand
    anynumberofotherfactors,coulddeterminehowmuchofthecropwouldbeavailabletothetortillachipmarketandatwhat
    price.Oursnackfoodcompanydoesn'thavethefacilitiestostorethecornavailableonthespotmarketat$2.35/bushel,but
    decidesthatthe$2.46priceforSeptembercornstillprovidesareasonableprofitmargin.The$2.60Decemberprice,though,
    indicatesthatthespotpriceofcornwillkeepclimbingatanacceleratingrate,and$2.60isfarmorethantheprocessoriswillingto
    payforabushelofcorn.
    Sothecompanybuysten5,000bushelSEPcontractsat246cents/bushel.InSeptember,itturnsoutthatthenewspotpriceis
    248cents/bushel.Becauseofalltheproceduralcomplicationsoftakingdeliveryofafuturescontract,thecompanywillsellthe
    contractjustbeforeitexpires.Bythispoint,thefuturespricewillequalthespotpriceandthecompanywillbeabletoengagein
    what'scalledareversingtradeandsellthecontractat248cents/bushel.
    Thecompanywillthenbuythe50,000bushelsofcornonthespotmarket.

    Ifyoudothemath,you'llseethatthehedgerhasapparentlybought$124,000worthofcorninSeptemberforaninvestmentof
    $123,000inJuly.Still,that'snotareal$1,000profitifyouconsiderthecompanycouldhaveboughtthesameamountofgrainfor
    thelowerpriceonthespotmarketatthetimeitboughtthefuture.Itmerelyeliminatedthecostofstoragewhileaddingon
    transactioncosts.
    LOOKOUT!
    Theprofitandlossinadeallikethisistypicallynegligible.Thetransactionismoreaccuratelyviewedasaninsurancepolicy.Along
    hedgeprotectsatraderagainstunanticipatedpricerises.Thatdidnotoccurinthisexample.TheSeptemberspotpricewasonlya
    couplecentshigherthanthemarketthoughtitwouldbetwomonthsearlier.IftherehadbeenarashoftornadoesintheMidwest
    orahugeorderplacedbyalargeoverseastradingpartner,thenSeptemberspotpricecouldhaverisento260cents/bushel,or
    evenhigher,andthecompanywouldhavebeenveryhappyithadthelonghedge.
    ShortHedging
    Inashorthedge,thehedgersellsafuturescontractinordertolimitexposuretoapriceshortfall.Typically,thisisdoneby
    farmers,minersoranyonewho,forwhateverreason,isholdingtheinventory(commercialhedgers).
    Inashorthedge,thehedgersellsafuturescontract.Assumeyou'reanagentforthefarmingcooperativeinNebraskathatgrows
    thecornunderlyingthecontractdescribedabove,inthesectiononlonghedging.Youwouldenterintothesamedealasthetortilla
    chipmaker,butyourincentivewouldbetolimittheriskifcornpricesdeclinedsharply.Ifalargeexpectedorderdidnot
    materialize,ifadevelopingnationshouldsuddenlydumplowercostcornontheworldmarketorifunusuallyfavorablesummer
    weathershouldcauseasupplyglut,youknowthatthereareatleast50,000bushelsyoucansellatapriceyoucanlivewith.
    LOOKOUT!
    Mechanically,theshorthedgersellsthecontractsatthefuturespricetoopenthehedge,then,essentially,buysitbackatthe
    prevailingspotpricetocloseit.

    Next:Leverage

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