hedging of commodities - UCY ENERGY helps you to develop your individual hedging strategy

The other classic hedging example involves a company that depends on a certain commodity. Let's say a refinery is worried about the volatility in the price of crude oil. The refinery  would be in deep trouble if the price of crude were to skyrocket, which would eat into profit margins severely. To protect (hedge) against the uncertainty of crude prices, the refinery can enter into a futures contract (or its less regulated cousin, the foreward contract), which allows the refinery to buy the crude at a specific price at a set date in the future. Now the refinery can budget without worrying about the fluctuating commodity.

If the crude skyrockets above that price specified by the futures contract, the hedge will have paid off because CTC will save money by paying the lower price. However, if the price goes down, CTC is still obligated to pay the price in the contract and actually would have been better off not hedging. 

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last update: Dezember 28, 2018