How do large corporations hedge?
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Thread: How do large corporations hedge?

  1. #1
    How can big businesses go about searching?
    Lets say there's a commodity XYZ the corporation uses as a raw material in manufacturing, and it signifies a large enough annual expense they dont need to take a risk on changes in price.

    Do they

    a) decide that commodity XYZ is trading in what they consider to be a low price, then decide to buy whatever amount they deem appropriate? OR

    b) every quarter/year/whatever time period, decide to buy a particular quantity of the commodity because they don't have any clue which direction it's heading andthey just wish to lock in the price?

    Quite simply, do they (a) know the market so well that they know when its in a fantastic price to lock in prices long term or (b) have no clue what direction price is going and just need to lock in prices to avoid risk?

    Or perhaps neither of those situations are accurate.

  2. #2
    Quote Originally Posted by ;
    How can big corporations go about hedging? Lets say there's a commodity XYZ the company uses as a raw material in manufacturing, and it represents a large enough annual expense they dont want to take a risk on changes in price. Do theya) determine that commodity XYZ is trading at what they believe to be a minimal price, and then decide to buy whatever amount they deem suitable? OR b) each quarter/year/whatever time frame, decide to buy a certain amount of this commodity because they don't have any clue which direction it's heading andthey...
    Hi relyt,
    I've worked in a Corporate Treasury function and the answer is it depends upon the reason they are hedging.

    Some companies do take a look on the commodity/currency prices that affect them and hedge if they think it's favourable in a bid to make a Treasury profit donation into the business, so to speak. Their function includes being a profit center, profit or loss typically being measured as the average price the company accomplishes compared to the ordinary price of their commodity/currency over the period.

    Others are not bothered by profit motives in Treasury, they just want to decrease risk and have pricing certainty. They would only hedge to lock in prices for a period of time, most do so on a rolling basis like quarter by quarter rather than all in one go at the start of the year, in order to ensure they get a productive price closer to the average price for the year.

    This is a fairly simplistic outline, in fact there's a lot more sophistied things going on, with options and swaps in addition to futures would be examples of this. Hope that helps

  3. #3
    Quote Originally Posted by ;
    quote Hi, I have worked in a Corporate Treasury purpose...
    Thanks marcmarc, this is exactly the sort of insight I was looking for!

  4. #4
    Quote Originally Posted by ;
    quote Google Assets stocks and currency egy used by fabriing importers and exporters. Hehe GS
    The reason for my above post isn't to share in its own enjoyment except to lessen pains.

    Cheers

  5. #5
    Quote Originally Posted by ;
    How do big businesses go about hedging? Lets say there is a commodity XYZ the corporation uses as a raw material in manufacturing, and it represents a large enough yearly expense they dont need to take a risk on changes in price. Do theya) determine that commodity XYZ is trading at what they consider to be a low price, then decide to buy whatever quantity they deem appropriate? OR b) every quarter/year/whatever time period, decide to buy a particular quantity of this commodity because they don't have any clue which direction it is going andthey...
    Google hedging stocks and currency egy employed by fabriing importers and exporters.

    Hehe
    GS

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