What is Hedging:  As per the business directory, Hedging is a risk management strategy used in limiting or offsetting probability of loss from fluctuations in the prices of commodities, currencies, or securities. In effect, hedging is a transfer of risk without buying insurance policies. Hedging is done by the various risk derivatives. To understand this, it is important to first understand the basics of risk derivatives.

Tanker_offshore_terminal

Broadly speaking there are two types of risk derivatives. Exchange traded and over the counter derivatives. As the name suggests, exchange traded derivatives are traded in the international exchanges (for example New York Mercantile exchange, NYMEX), where standard contracts, terms of which have been defined by the exchange are traded.

Over the counter (OTC) derivatives are traded through dealers and the contracts are tailor made. OTC derivatives come with the risk of other party not fulfilling his obligations.

In the trade exchange, future contracts and Options contract derivative are normally traded and Oil/gas companies choose these two hedging contracts.

risk derivatives

To understand these hedging techniques, assume that I am oil/gas Production Company and I am producing 100000 barrels in a month. Today’s  crude oil price is $80/barrel. I am afraid that by next month , when I will have inventory of around 100000 barrels, the crude oil price may fall to below $75/Barrel, and I might make a loss of $500000 compared with today’s crude oil price.  Lets see how I can use hedging to reduce this loss.

1. Future and Forward contracts:
(The fundamental difference between future and forward contracts is that one is traded in exchanges while other is traded OTC, here I will discuss Future contracts).

“Future contracts between two parties A & B is a contract where party B has the obligation to deliver a commodity on agreed date and party A has the obligation to pay on same date the price, which is agreed today”.

So in my case I am party B and in a future contract with A today, I agree to deliver 100000 barrels of crude oil on 11th Dec 2014 and party A agrees to pay the listed price for Dec 2014 in the trade exchange (say NYMEX). Let us assume the listed price for Dec 2014 is $81/Barrel. It is important to note that I do not have to actually (physically) deliver the crude oil to party A.
Now in Dec 2014 when I have produced 100000 barrels of crude oil. Lets consider two scenarios

Scenario 1: Crude price drops to $75/barrels as expected by me.

In the Physical market

I sell 100000 barrels of crude oil @ $75/barrel to get $7500000 where as I had expected $8000000 so I incur loss of $500000 in the physical market.

In the Future contract

My obligation is to deliver 100000 barrels of crude oil which in dec 2014 will cost me $7500000 @ $75/barrel. But party A has the obligation to pay me @$81/barrel so total of $8100000. This way in the future contract I make profit of $600000.
Net profit I make is $600000 (Future contract) – $500000 (Physical market) = $100000

So I have hedged the crude oil price with future contract.

Scenario 2: Crude price increase to $82/barrels.

In the Physical market

I sell 100000 barrels of crude oil @ $82/barrel to get $8200000 where as I had expected $8000000 so I have profit of $200000 in the physical market.

In the Future contract

My obligation is to deliver 100000 barrels of crude oil which in Dec 2014 will cost me $8200000 @ $82/barrel. But party A has the obligation to pay me @$81/barrel so total of $8100000. This way in the future contract I make loss of $100000.
Net profit I make is $200000 (Physical market) – $100000 (Future contract) = $100000

So in both case of crude oil price reducing or increasing, I have made more money than I had expected in Nov 2014. With different number, it might also show some loss, even with future contract but the loss will be much lesser than what would have been incurred without hedging.

2. Hedging by OPTIONS Contract

There are two types of options contracts. Call & Put.

The relevant contract for me as Oil/gas production company will be PUT options.

“When I buy PUT options contract from another party (say party A), I have the option to sell my commodity (crude oil in this case) to party A at a particular price but I am not obliged to do so. It is upto me, if I want to exercise my option to sell my commodity to party A. My this right has an expiry date and I can use my option on any date before the expiry”.

Off course I will only exercise my option if the price of the crude oil has decreased and not if the price of crude oil has increased. However to buy this right (option contract) I have to pay a premium to party A.

risk

Let us assume that I buy “Put option contract” from party A at lock in price of $80/Barrel for crude oil. Table above shows, how after using “Hedging by Options contract”, I do not incur any loss even when the price of crude oil has fallen from $80 to $70.

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Finn Walsh
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Meg Blunt
1 year before

Best Crypto Recovery's Experts/RecoveryMasters My experience of online scamming took seconds and cost me thousands. I was fooled by a YouTube video that convinced me that I could make a killing in Crypto, and the minute I clicked the link and deposited funds, I knew something was up, but it was too late. I worked with Recovery Masters, and they were so helpful and supportive, and in the end, it took a few days, I got almost all of the money back. It wouldn't have been possible for me to meet up economically because I almost invested all my money but all thanks to RecoveryMasters with their genius effort to help me recover my already stolen currency. Please ensure also to consult if you need such help: RecoveryMasters via email: (recoverymasters@email.cz) or whatsapp +1(551) 202-23-35

Rand
Rand
1 year before

Dear Sir/Ma, Are you an individual businessman or a business organisation that wishes to expand in business ??, we offer financial instrument such as BGs, SBLCs, LCs, and others on lease and sales at a rate of 4%+2% of the face value and reasonable conditionfrom a genuine provider. You are at liberty to engage our leased facilities into trade programs as well as in signatory project(s) such as Aviation, Agriculture, Petroleum, Telecommunication and any other project(s) etc. With our financial/bank instrument you can establish line of credit with your bank and/or secure loan for your projects in which our bank instrument will serve collateral in your bank to fund your project. We deliver with time and precision as set forth in the agreement. Our terms and Conditions are reasonable and we work directly with issuing bank lease providers, this instrument can be monetized on your behalf for upto 100% funding. Intermediaries/Consultants/Brokers are welcome to bring their clients and are 100% protected. In complete confidence, we will work together for the benefits of all parties involved. All relevant business information will be provided upon request. BROKERS ARE WELCOME & 100% PROTECTED!!! If Interested kindly contact Mr Rand Alan email:randalan025@gmail.com

Richard Hugo
Richard Hugo
1 year before

Hello, We offer Swift MT760 BG/SBLC, FC MTN, BCL, DTC, KTT, EUROCLEAR, Bank Draft, Letter of Credit (LC), MT103 Etc. N/B : Provider’s Bank move first. Let me know if you have any need for the above offers. Email : richardhugo1973@gmail.com Name: Richard Hugo

NORBERT KENNEDY
NORBERT KENNEDY
1 year before

HOW TO RECOVER A LOST OR STOLEN BITCOIN Those cryptos (Bitcoins) which you lost in the previous six months can be retrieved by this brilliant HACK ANGEL. He assisted me in recovering $63,830 in bitcoins that I had lost to online scammers. They promised me 10% interest on my investment every week, but all they did was ask for more money. Because of my carelessness, I almost lost my marriage until HACK ANGEL literally saved me. If you require assistance, please contact HACK ANGEL via EMAIL: hackangel@cyberdude.com. Whatsap: +1 203 309-3359; website: https://hackangel4.wixsite.com/hackangel. He also assisted a friend of mine in gaining access to a phone's messages, pictures, GPS, and call logs.

NORBERT KENNEDY
NORBERT KENNEDY
1 year before

HOW TO RECOVER A LOST OR STOLEN BITCOIN Those cryptos (Bitcoins) which you lost in the previous six months can be retrieved by this brilliant HACK ANGEL. He assisted me in recovering $63,830 in bitcoins that I had lost to online scammers. They promised me 10% interest on my investment every week, but all they did was ask for more money. Because of my carelessness, I almost lost my marriage until HACK ANGEL literally saved me. If you require assistance, please contact HACK ANGEL via EMAIL: hackangel@cyberdude.com. Whatsap: +1 203 309-3359; website: https://hackangel4.wixsite.com/hackangel. He also assisted a friend of mine in gaining access to a phone's messages, pictures, GPS, and call logs.

NORBERT KENNEDY
NORBERT KENNEDY
1 year before

HOW TO RECOVER A LOST OR STOLEN BITCOIN Those cryptos (Bitcoins) which you lost in the previous six months can be retrieved by this brilliant HACK ANGEL. He assisted me in recovering $63,830 in bitcoins that I had lost to online scammers. They promised me 10% interest on my investment every week, but all they did was ask for more money. Because of my carelessness, I almost lost my marriage until HACK ANGEL literally saved me. If you require assistance, please contact HACK ANGEL via EMAIL: hackangel@cyberdude.com. Whatsap: +1 203 309-3359; website: https://hackangel4.wixsite.com/hackangel. He also assisted a friend of mine in gaining access to a phone's messages, pictures, GPS, and call logs.

NORBERT KENNEDY
NORBERT KENNEDY
1 year before

HOW TO RECOVER A LOST OR STOLEN BITCOIN Those cryptos (Bitcoins) which you lost in the previous six months can be retrieved by this brilliant HACK ANGEL. He assisted me in recovering $63,830 in bitcoins that I had lost to online scammers. They promised me 10% interest on my investment every week, but all they did was ask for more money. Because of my carelessness, I almost lost my marriage until HACK ANGEL literally saved me. If you require assistance, please contact HACK ANGEL via EMAIL: hackangel@cyberdude.com. Whatsap: +1 203 309-3359; website: https://hackangel4.wixsite.com/hackangel. He also assisted a friend of mine in gaining access to a phone's messages, pictures, GPS, and call logs.

NORBERT KENNEDY
NORBERT KENNEDY
1 year before

HOW TO RECOVER A LOST OR STOLEN BITCOIN Those cryptos (Bitcoins) which you lost in the previous six months can be retrieved by this brilliant HACK ANGEL. He assisted me in recovering $63,830 in bitcoins that I had lost to online scammers. They promised me 10% interest on my investment every week, but all they did was ask for more money. Because of my carelessness, I almost lost my marriage until HACK ANGEL literally saved me. If you require assistance, please contact HACK ANGEL via EMAIL: hackangel@cyberdude.com. Whatsap: +1 203 309-3359; website: https://hackangel4.wixsite.com/hackangel. He also assisted a friend of mine in gaining access to a phone's messages, pictures, GPS, and call logs.

NORBERT KENNEDY
NORBERT KENNEDY
1 year before

HOW TO RECOVER A LOST OR STOLEN BITCOIN Those cryptos (Bitcoins) which you lost in the previous six months can be retrieved by this brilliant HACK ANGEL. He assisted me in recovering $63,830 in bitcoins that I had lost to online scammers. They promised me 10% interest on my investment every week, but all they did was ask for more money. Because of my carelessness, I almost lost my marriage until HACK ANGEL literally saved me. If you require assistance, please contact HACK ANGEL via EMAIL: hackangel@cyberdude.com. Whatsap: +1 203 309-3359; website: https://hackangel4.wixsite.com/hackangel. He also assisted a friend of mine in gaining access to a phone's messages, pictures, GPS, and call logs.

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