Regulated Futures and Options

The most common way for you to begin a hedging program for your company is to use Futures & Options traded on regulated exchanges (like the NYMEX and CME). After you have determined your risk and developed a hedging strategy to mitigate that risk, the next step is to execute that strategy by buying or selling futures contracts (or options on futures contracts).

There are many benefits that come from hedging using futures and options on futures:

  • Liquidity: because of the large volumes traded on regulated exchanges the most important contracts can be easily traded.
  • Counterparty: rather than trading with a single counterparty (and assuming the risk of financial stability of that counterparty), regulated markets guarantee counterparty performance.
  • Competitive Prices: because all prices on bids, offers, and executed transactions are public and there are so many market participants, your price will be the best the market can offer at the time of your trade

However, using regulated markets to hedge does come with constraints. The most important is maintenance of a margin balance with the exchange. One of the ways the regulated exchanges guarantees performance is by requiring that all participants maintain a margin balance as a “bond” against non-performance. Margin requires cash management as part of your hedging strategy.

Working with a qualified broker–and POWERHOUSE is the most qualified–can make executing a hedge strategy and trading on exchanges easier in a couple ways:

  • Trade Execution: because trades are done in the open, getting the best price for trades can depend on many variables when placing an order including: time of day, lot size and initial price to bid/ask.

Trade/Market Monitoring: watching the markets throughout the day allows you to take advantage of emerging price trends as they begin.

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