Although some consider Hedging to be an advanced and difficult to discern concept, the execution of hedges is in fact extremely basic. Free commodity tips providers and risk managers in the market use futures contracts,
and combinations there of to lock-in prices for a given period, which are proven effective ways to hedge against losses. This allows a company to know exactly what they will pay for their energy during that time and plan for that price accordingly. The real challenge of hedging is setting up a strategy that matches a company’s risk appetite and hedging goals. We can say that free commodity tips are very helpful for all traders.
Hedging to Mitigate Risk
Hedging is especially significant for companies that produce or consume large quantities of energy such as natural gas, crude oil, etc. However, many companies look at hedging as a profit strategy, which it is not. The point of hedging is not to make money but rather balance the risk. That, in and of itself, is another term that needs to be defined. In some cases, a company’s risk will be based upon the price that they will purchase or sell their energy. For others, the risk could be defined as the cost of opportunity to transact at a lower or higher price so that they may use saved funds to move forward with other projects or technologies.
Here are a couple of tools to help manage hedging programs:
Futures and Forward Contracts
Futures are the basic contract to buy a predefined asset of standardized quantity, on a certain date at a certain price. Future contracts are ensured by a clearinghouse, which limits the risk of opposite party default. Forward contracts are a standard contract between two parties and don’t have as inflexible terms and conditions, as a futures contract. Moreover, there are chances of opposite party defaulting on its commitment. Future contracts are widely used in the commodity market. The concept of future contract is not new; it has been used by many ancient civilizations to prevent their harvest and other assets from probable future losses.
Options are a very flexible hedging tool. An organization or investor can buy a ‘call’ option, which is the entitlement to purchase an asset at a specific price, or a ‘put’ option, to sell at a specific price at a future date. Unlike futures, the option owner isn’t required to consummate the transaction if the market price is more profitable than the option price.
Organizations hoping to protect themselves from uncontrolled market fluctuations would be better served by at least researching what an explicit hedging program delivers to the business. Market participants and share market tips experts should be able to smooth the ups and downs of prices and build a strategy that fits their unique goals and risk appetite. A well-defined hedging program is an essential part of mitigating energy price risk, and the right strategy and tools can help achieve a company’s risk management and hedging goals.