Advanced Hedging and Price Protection
After hedging a while some companies and managers begin to ask if it’s possible to use hedging instruments and techniques to further enhance business outcomes.
Is there a way to protect against weather uncertainty?
Many companies will experience revenue or net income variability based on weather. There are now hedging tools that can be used to supplement revenue if there are too few (or too many) days when it is too hot or too cold. Other businesses are affected by too much or too little precipitation in the form of rain or snow.
There are now hedging instruments that will allow companies to get paid when the weather turns against them.
If you can determine the cost to your business of a day of adverse weather, POWERHOUSE can help find a price and execute a trade to insure against an adverse weather outcome.
Standard contracts are too large for parts of my business. Is there something I can do?
Managing hedging in a business that has many small transactions or customers can be complicated by trying to aggregate transactions to support the volume of a single standard hedge contract. Then deciding when to exit that position as the risk goes away can also be complicated.
POWERHOUSE may be able to help you find hedging instruments at sizes down to a single gallon at competitive prices.
Are there ways to take advantage of predictable price/basis moves or other market opportunities?
Because the futures market can provide a price for many months in advance. Situations can arise when the difference between current prices and a future price is greater than the cost of carrying inventory. An inventory holder could take advantage of the extra margin by selling the future product. Futures and wet values tend to converge at expiration, providing the trader with additional profit. This transaction is called the “storage play.”
Is there a better way to manage propane price uncertainty?
For years Propane has been problematic: the only way to gain price certainty was to “lock-in” a price differential with a supplier a year in advance. That is changing. The liquidity of propane futures contracts has increased significantly in recent years. This allows you to manage price risk yourself by hedging with a futures contract.
Can I hedge margin rather than cost or price?
Sometimes using multiple hedge contracts in a ‘structured’ trade can provide a means of hedging aspects of your business for which there is no direct hedge instrument. For instance, refiner’s margins on gasoline by locking in a margin on products in storage can be hedged using a spread trade (i.e. trading two or more contracts simultaneously in a related trade). The refiner’s gasoline margin is called the “Gas Crack.” It’s the difference between RBOB and Crude Oil. Its commonly used in the first quarter when retail gasoline margins are under pressure. The crack spread can provide margin to offset a loss at the pump.
How can I prepare for, or take advantage of, climate/environment changes?
RINs and RECs (along with many other environmental credits and offsets) have been part of the energy business for quite a while. Recently POWERHOUSE has started working with clients to hedge that part of our clients’ business. Let us tell you how.
There are many more potential solutions to managing business price risk requiring an awareness of changes in the futures slate. POWERHOUSE is aware of these changes and, as your futures advisor, can make you aware of the changing landscape. A close partnership with our clients means more focus on changes that create useful risk management possibilities.