Are Your Positions Hedged?
Hedging can be a grossly misused term. By definition, a hedge is an investment position intended to offset potential losses or gains that may be incurred by a companion investment. A hedge is not speculation on whether prices will move up or down. That’s not to say a hedging strategy cannot involve a view on where the market will move, but simply that hedging is not speculative in nature. There are two main types of hedging, systematic and strategic. Strategic hedging can be based around a market view, assets or contracts, operations plan, and many other individual strategies. Systematic hedging is algorithmic in nature, when “A” + “B” equals “C” the appropriate hedge transaction is placed. In order to monitor and effectively manage a systematic hedging program, a comprehensive price risk management program should be implemented with proper controls, limits, and accountability.
It’s all about margin protection! In an organization with commodity inputs or outputs, a hedge can offset the gain or loss from the sales or purchase of the corresponding physical commodity. The purpose of the hedge is to minimize the financial impact to the company if the corresponding commodity price were to move adversely, not predicting the market. If margin protection is important to the operation of your business, a proper price risk mitigation program can be critical. Every organization is unique and careful evaluation is needed to identify the risk tolerance of individual business units and the organization.
What Challenges Are Inherent in Managing Commodity Price Risk
- Commodity price risk management should be viewed as a margin stabilization process rather than an unnecessary cost.
- Gathering buy in from business unit leaders and senior leaders who will become passionate about implementing long-term risk mitigation strategies such as revising contract structures or pricing changes.
- Procuring and applying sufficient tools to engage customers and suppliers on contract terms using a risk-return perspective and to develop innovative approaches that are mutually beneficial.
- Integrating and automating the aggregation of large amounts of data and assumptions.
- Evaluating how each risk mitigation strategy will consequently influence the financial outcomes of the business.
About Nexidus Commodities
Nexidus Commodities provides commodity hedging, risk management, and analytical services to a large range of industries. Our mission is to provide clarity, direction, and strategy to better manage commodity price volatility that exists on an ongoing basis. We review our clients existing hedging strategies to identify gaps and improvements. Nexidus offers a full range of services including one-time consultations, analytics and reporting, risk management planning, as well as a fully outsourced hedging solution that executes on behalf of our client’s requirements and goals. www.nexidus.net
This communication is not a solicitation to buy or sell derivative instruments. The trading of derivatives such as futures, options, and swaps may not be suitable for all investors. Derivative trading involves substantial risk of loss, and you should fully understand those risks prior to trading. Past financial results are not necessarily indicative of future performance. Nexidus Commodities, LLC is a member of the National Futures Association (NFA) and registered with the Commodity Futures Trading Commission (CFTC) as a Commodity Trading Advisor. Certain Nexidus services are available only to individuals or firms who qualify under CFTC rules as a ‘Qualified Eligible Participant’ (QEP) and who have been accepted as customers of Nexidus.