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.
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.