1 / 15

Hedging & Futures

Hedging & Futures. Presented by Jonathan Truong. Agenda. Futures Review What is Hedging What to Consider Wheat Example Gas Example. Review on Futures . Forward contract Many players Make/take deliveries Speculating prices Open/close positions Clearing house. Hedging.

oya
Download Presentation

Hedging & Futures

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Hedging & Futures Presented by Jonathan Truong

  2. Agenda • Futures Review • What is Hedging • What to Consider • Wheat Example • Gas Example

  3. Review on Futures • Forward contract • Many players • Make/take deliveries • Speculating prices • Open/close positions • Clearing house

  4. Hedging • What is hedging? • Future contracts to limit exposure to commodity prices • Used to offset natural risk exposure on profits and expenses • Not meant for income production mechanism

  5. Things to Consider • Hedging with future contracts • Maturity • Units of commodity per contract • How many contracts you need • Initial margins to initiate positions • Maintenance margin

  6. Wheat Contract Farmer • Contract – sell (short) 4 • Contract = 50,000 bushels @$4.50/bushel • Maturity is 1 month/contract • MM is 10% Notional • 4(50,000*4.5) = $900,000 • MM = .10*90,000 = $9,000 Baker • 4 contracts/mo

  7. Scenarios • month 1 • Bumper crop • 4(50,000*4.5) = $900,000 • 10 contracts extra of bushels (no futures) • Spot sell • Assume demand was low, @$4.4/bushelAssume demand was high, @$4.7/bushel • Farmer savings in contracts • 4(50,000(4.5-4.4)) = +$20,000 | 4(50k(4.5-4.7)) = -$40,000 • Farmer loss/savings in extras (not in futures) • 10(50,000(4.4-4.5)) = -$50,000 | 10(50k(4.7-4.5)) = +$100,000 • Net delta -$30,000 +60,000

  8. Scenarios • Drought • Able to deliver partial contract for that month/all/no futures • Spot deliver the rest @$5.70/bushel

  9. Delivery Company Example • 90,000 gallons of fuel • Hedge for next 3 months • 2 contracts/month x 3mo • Margin is $68,850

  10. Exp. Information • Average price for a gallon: $3.50 What are the fuel savings? month 1 = 90,000($3.50 - $3.25) =$22,500 month 2 = $45,000 month 3 = $63,000 Gain from fuel savings = $130,000

  11. How much did you lose on your futures contracts? month 1 = 84,000($2.6813 - $2.8974) = - $18,152.40 month 2 = - $39,127.20 month 3 = - $55,935.60 loss on future = -$113,215.20

  12. Review Q. • Was this a good hedge?

  13. References • "Hedge (finance)." Wikipedia. Wikimedia Foundation, 18 May 2013. Web. 22 May 2013. • "Introduction to Hedging with Futures." YouTube. YouTube, 18 Dec. 2011. Web. 23 May 2013. • Kuepper, Justin. "Speculating vs. Hedging With Futures Explained." Commodity HQ. N.p., 23 Dec. 2012. Web. 25 May 2013. • "What Is the Difference between Hedging and Speculation?" What Is the Difference between Hedging and Speculation?N.p., 26 Feb. 2009. Web. 25 May 2013. <http://www.investopedia.com/ask/answers/06/hedgingversusspeculation.asp>. • Wisner, Robert. "Principles of Hedging with Futures." MARKETING & UTILIZATION Cooperative Extension Service. Purdue University, May 2002. Web.

  14. Questions?

More Related