Thursday, May 15, 2008

FT Alphaville » Blog Archive » More than you (may) need to know about commodities hedging

This one will definitely be used in class. From the Financial Times.

How will it be used in class? For instance, the story starts out saying more are hedging now after prices have risen (like closing the barn door after horses have escaped?). It also talks about how much and what type of hedging is currently being done.

FT Alphaville » Blog Archive » More than you (may) need to know about commodities hedging:
"Airlines and other transportation companies are much more active than other energy commodities consumers when it comes to hedging using financial instruments, with nearly 65 per cent of their total exposure hedged in this way. In comparison, the typical industrial company uses financial instruments to hedge just over 40 per cent of its exposure, and utilities hedge an average 48 per cent.

In carrying out their financial hedging strategies, slightly more than 70 per cent of the survey participants said they use OTC swaps. Just over half use OTC options and roughly a third use structured derivatives. Fifty-eight per cent of the companies also say they actively trade physical products with dealers.

Across all industries, hedging strategies vary widely in terms of sophistication and approach, notes Greenwich. Many participants in the 2008 survey said they have no actual hedging policies at all or carry out their hedging through a largely subjective process. Others, especially airlines and oil companies, use advanced formulaic strategies to hedge individual commodities exposures and make strategic decisions about hedging policy at the board level."

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