{"id":5013,"date":"2024-04-02T22:37:13","date_gmt":"2024-04-02T22:37:13","guid":{"rendered":"https:\/\/inhedge.mx\/?p=5013"},"modified":"2024-12-03T23:55:26","modified_gmt":"2024-12-03T23:55:26","slug":"financial-hedging-for-commodities-with-inhedge","status":"publish","type":"post","link":"https:\/\/inhedge.mx\/en\/financial-hedging-for-commodities-with-inhedge\/","title":{"rendered":"Financial hedging for Commodities with InHedge"},"content":{"rendered":"\n

Companies directly involved in the raw materials supply chain would do well to enhance their risk management strategies by learning to protect their losses through financial hedging, especially with the high volatility of commodity prices. Many of these raw materials trade similarly to stocks, and some markets are just as accessible even to retail investors. In this blog, we will present the tools available so that anyone can learn how to start applying financial hedging, which can be as simple as opening an account and placing a trade.<\/p>\n\n\n\n

Modern financial markets exist solely to facilitate the gathering of those with monetary and non-monetary assets to do business. Now it’s easier than ever. With few exceptions, anyone with a laptop, internet access, and a bank account can enter a brokerage and buy a wheat futures contract, for example, in a few clicks. Although this article is aimed at companies whose activity depends on these raw materials for income, it is important to understand that markets are accessible to almost everyone.<\/p>\n\n\n\n

What is hedging?<\/strong><\/strong><\/h2>\n\n\n\n

“Hedging” is simply a protective position. It is unlikely to be profitable for the owners of the financial hedge, but it is cheap enough that the benefits of a main position are not affected as much. The classic example is car insurance: the main position is the car, and the insurance is the hedge. Car insurance is minimal compared to the value of the car, but if the car has an accident, car insurance minimizes the cost of repairing or replacing it.<\/p>\n\n\n\n

Who needs to hedge Commodities?<\/strong><\/strong><\/h2>\n\n\n\n

To answer the question, any company or business whose profits depend on the price of a specific raw material should seriously consider applying a hedge in commodity markets. Although applying a hedge could reduce potential profits compared to not doing so, financial hedging provides much more stability to total income by offering protection in case of price collapses.<\/p>\n\n\n\n

Moreover, commodity markets are also the subject of active trading by speculators who use information and knowledge about a specific raw material to profit. These investors tend to use complex strategies, including financial hedging, to protect the basic investments of a portfolio.<\/p>\n\n\n\n

My company deals with Commodities, how can I implement a hedge?<\/strong><\/strong><\/h2>\n\n\n\n

The way to carry out the hedge largely depends on what proportion of a company’s income is linked to a specific raw material. For a smaller company, it may be sufficient to hire a small investment firm to handle the hedge on its behalf. For a larger company, it may have an entire trading room with commodity experts actively trading in derivative markets (options and\/or futures) to protect the company’s income every day.<\/p>\n\n\n\n

To provide some details of the hedge itself, we will consider both a company that hedges commodities and an investor. The hedging company protects the raw material that is part of the main source of income for the business, while the investor does so to protect the main positions of their portfolio. In both cases, the best tools can be the options or futures markets. Although options and futures market contracts expire at defined intervals, commodity futures contracts are usually traded more actively than options contracts and offer more liquidity due to higher volume. This means that you are more likely to have your order executed in a futures contract than in an options contract. Although futures contracts have a higher volume than options, options contracts are considerably cheaper and offer more effective hedging.<\/p>\n\n\n\n

In any case, hedging is usually done similarly. Below we offer an example to illustrate some of the important parts of a hedge. This example is purely illustrative, so we recommend that you familiarize yourself with how commodity markets work before attempting to hedge for your company.<\/p>\n\n\n\n

Hedging example: Lumber<\/strong><\/strong><\/h2>\n\n\n\n

With lumber prices soaring, let’s use it as an example of a hedge and an investor to show how a hedge can be achieved. As a reference, construction lumber futures are currently trading over 200% higher than their price a year ago.<\/p>\n\n\n\n

Hedger<\/strong><\/h2>\n\n\n\n

A large homebuilding company depends on lumber to build houses. When hired in 2022, the new CFO launched a plan to add a long position in lumber futures to protect the company if lumber prices rose in 2023. He bought lumber futures contracts in November 2022 at $484 with expiration on January 16, 2023. Let’s imagine he bought 10 futures contracts. A lumber contract is standardized at 110,000 board feet, and the price of $484 is quoted per 1,000 board feet. This means that the $484 is multiplied by 110 to get a contract value of $53,240 per contract. With ten contracts, the company’s position amounted to $532,400. <\/p>\n\n\n\n

When the contract expired in January 2023, assuming the CFO closed the positions on January 4 (the first trading day of 2023), the quoted price was $700, so the position value had risen to $770,000, i.e., a gain of $267,600. Although the business was hurt by the rise in lumber prices, the CFO was able to reduce that loss of income by $267,600 by applying a lumber futures hedge.<\/p>\n\n\n\n

Investor<\/strong><\/strong><\/h2>\n\n\n\n

An investor, on the other hand, might have a bullish position in lumber futures. He will buy futures and, as the expiration date approaches, he will sell the current contract and buy the next month’s contract. At the same time, he can hold short positions in options where the underlying companies are related to the price of lumber. <\/p>\n\n\n\n

This could include companies like Home Depot, Lowe’s, or our homebuilding company from the previous example. If he has a long position in lumber futures, but lumber prices fall, then the mentioned companies would also likely fall. Let’s say Home Depot (HD) options cost $5.60 per share, and each option contract is a standard 100 shares of HD. This means that a single put (or short) option contract costs $560. If the investor were to short 100 shares of Home Depot instead of the option, assuming a price of $300 per share, he would have to invest $30,000 instead of just $560 for the put option.<\/p>\n\n\n\n

In summary, it is obvious that hedging is not only widely used by companies involved in commodity markets, but it is also crucial for these companies and investors to consider applying financial hedging to protect against sharp price variations. There are many tools to hedge, but doing so without training or experience could increase risk instead of reducing it. <\/p>\n\n\n\n

Contact us<\/a> if you\u2019d like to receive more information.<\/p>\n","protected":false},"excerpt":{"rendered":"

Coberturas Financieras para Commodities con InHedge.<\/p>\n","protected":false},"author":1,"featured_media":3926,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[73,58,59,60],"tags":[63],"class_list":["post-5013","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-agribusiness","category-energy","category-fx","category-metals","tag-coberturas-financieras"],"yoast_head":"\nFinancial hedging for Commodities with InHedge - InHedge<\/title>\n<meta name=\"description\" content=\"Hedging against commodity price volatility? 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