How do large corporations hedge? | Forex Factory

Options

Permalinks
Print Thread

Similar Threads

Hedge Large Upswings - Is it advisable? 10 replies

Large account + large volume - Optimum Clearing Options? 13 replies

Large Corporations using forex to save on international wires? 0 replies

Hedge strategy (not a hedge fund) 13 replies

6 Basket Hedge: Large Swap 10 replies

How do large corporations hedge?

  • #1
  • First Post: Mar 1, 2018 9:47pm Mar 1, 2018 9:47pm
How do large corporations go about hedging?
Lets say there is a commodity XYZ that the corporation uses as a raw material in production, and it represents a large enough annual expense that they dont want to take a risk on changes in price.

Do they:

a) determine that commodity XYZ is trading at what they consider to be a low price, and then decide to buy whatever quantity they deem appropriate? OR

b) every quarter/year/whatever time period, decide to buy a certain amount of the commodity because they have no clue which direction it is heading andthey just want to lock in the price?

In other words, do they (a) know the market so well that they know when its at a good price to lock in prices long term or (b) have no clue what direction price is going and just want to lock in prices to avoid risk?

Or maybe neither of those scenarios are accurate.
  • #2
  • Mar 1, 2018 10:45pm Mar 1, 2018 10:45pm
Quoting relyt
How do large corporations go about hedging? Lets say there is a commodity XYZ that the corporation uses as a raw material in production, and it represents a large enough annual expense that they dont want to take a risk on changes in price. Do they: a) determine that commodity XYZ is trading at what they consider to be a low price, and then decide to buy whatever quantity they deem appropriate? OR b) every quarter/year/whatever time period, decide to buy a certain amount of the commodity because they have no clue which direction it is heading andthey...
Google hedging stocks and currency strategy used by manufacturing importers and exporters.

Hehe
GS
  • #3
  • Mar 2, 2018 1:24am Mar 2, 2018 1:24am
Quoting relyt
How do large corporations go about hedging? Lets say there is a commodity XYZ that the corporation uses as a raw material in production, and it represents a large enough annual expense that they dont want to take a risk on changes in price. Do they: a) determine that commodity XYZ is trading at what they consider to be a low price, and then decide to buy whatever quantity they deem appropriate? OR b) every quarter/year/whatever time period, decide to buy a certain amount of the commodity because they have no clue which direction it is heading andthey...

Hi relyt,
I've worked in a Corporate Treasury function and the answer is that it depends on the reason they are hedging.

Some firms do take a view on the commodity/currency prices that affect them and hedge when they think it is favourable in an effort to make a Treasury profit contribution to the business, so to speak. Their function includes being a profit centre, profit or loss typically being measured as the average price the company achieves compared to the average price of the commodity/currency over the period.

Others aren't bothered by profit motives in Treasury, they just want to reduce risk and have pricing certainty. They would just hedge to lock in prices for a period, most do this on a rolling basis like quarter by quarter rather than all in one go at the start of the year, so as to ensure they get an effective price closer to the average price for the year.

This is a pretty simplistic outline, in reality there is a lot more sophisticated stuff going on, using options and swaps as well as futures would be examples of this. Hope that helps
  • #4
  • Mar 2, 2018 6:08pm Mar 2, 2018 6:08pm
Quoting marcmarc
{quote} Hi relyt, I've worked in a Corporate Treasury function...
Thanks marcmarc, this is exactly the type of insight I was looking for!
  • #5
  • Last Post: Mar 2, 2018 8:41pm Mar 2, 2018 8:41pm
Quoting genghistar
{quote} Google hedging stocks and currency strategy used by manufacturing importers and exporters. Hehe GS
The reason for my above post is not to share in its pleasure but to lessen pains.

Cheers
0 traders viewing now