Marvelous. This and many of your videos are invaluable and deserve repeated watching. I just can’t thank you enough. I’m sure I speak for many viewers.
Thank you very much for this video Kevin! It must have been hard work making this video. This video helped me understand what fuel hedging is, and what "long" and "short" means in this context.
Absolutely the best best best video. This is what you call explaining, I've been watching so many videos and they are too complicated to really understand, what the mechanism is. Super.
wow huge THANK YOU. I've been going over my head with this topic, watched numerous videos but still always ended up getting confused with how buy what and how much. This video helped a lot.
Hey Kevin, I fully understand the hedge and that it was a good one because it mostly reduces the risk(risk isn’t defined as the possibility of having losses it is defined through out uncertainty so risk can be a loss or a profit) but when you compare it to a forward hedge, do you take into account the cost or expenses for the initial margin and would then a forward hedge with a bank be less expensive for the company ? I am really not sure how to evaluate the initial margin in terms of how efficient a hedge is and how to treat that cost. I hope you will reply soon and thanks in advance! :)
You are definitely correct that the margin requirements reduce the effectiveness of the hedge. For firms that have easy access to forward contracts with reasonable fees, those can be more effective as the forward doesn't have the same issues of intermediate cash flow swings (both in the initial margin and the mark-to-market adjustments).
Could u please explain. the part of futures contract. when we. initially paid $2.8974 for a contract and it closed a $2.6813 and that's a $0.2161 difference. but as I understand we paid a lower price for the futures contract and if the price rises we should be secure as we already agreed to pay a lower price which is fixed and as for the change in closing price. why should we be bothered about that?? confused here.
Hi Kevin, thanks for the nie video. Question: from the moment that you saw that the market in backwardation, why do you want to hedge against an increase in the gas price?
I think the answer would be that we cannot predict the market and the current figures show backwardization which puts us in a better position to hedge on that contract which is lower is price and to avoid price volatility plus cash flows can be determined. Im thinking if the current spot rate is high and the future rate is low, that gives us a better position to secure our financial position.
yes it can be done at any time, you will offset the position on the same contract, on the same exchange. So if you buy 1 rb dec 18 expiration, then you would sell 1 rb dec 18 exp to close.
because the 90000 is what actually used in each month, 84000 is for the 2 future contracts. Fuel saving does not matter by future contract but by the actual price of gas and amount used by the company.
Each Front Month expires, so you get to re-use that margin. So there is no use for that 3X Margin as you say, unless you are dong 3 months simultaneously, which you don't say is done, and your example shows that you are rolling over the contracts anyway, to hedge current monthly prices for 3 months.
The calculation shown at question 6 shows that in fact he did buy in total 6 contracts at the start of the hedge: 2 for each month which he wanted to hedge. At the moment of buying these 6 contracts is it necessary to provide the initial margin for each contract. And he seems to hold on to these contracts until their expiry date. So in this case is it not possible to re-use the margin, as the position is not being rolled forward.
Though the gain over the gas value was 17k odd, he paid 68k as IM at the beginning, so what about that? Is that like a deposit which he ll get back after the contacts closure or that's gone ??
U r right Rakshith. The IM is like a deposit. You will receive it at the end of the contract. But you have to consider the interest forgone on the IM to arrive at Complete profitability of the contract or for any other decision making purpose.
I think this is not hedging the risk, in the detail I write below, what I understand is that the contract was based on speculation. and that why if there is a change in the price agreed and the change in the closing price, high or low, would generate a profit or loss.
+Jack Linton This video was made a few years ago and I probably just made up the initial/maintenance margins. However, currently, initial margin (performance bond) is set at 110% of the maintenance margin (performance bond) level. So, if maintenance was set at $8500, the initial would be $9350.
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When you mention Distribution you are talking about Carrying Costs, right? I thought that Transportation was not a carrying cost, as Quantity, Quality, TIme , and Location (Where you will be picking it up from) are predetermined for Commodity Forwards that go to completion. At least thats what Kaplan is teaching. 😅
Hi, may I ask why are we comparing the price we buy the futures at vs the price it closed at? That seems to be for speculation purposes rather than hedging.. please correct me if I am wrong ... i.e. is hedging with futures about the hedging of the current spot vs futures price OR spot movement vs future price movement?
@@kevinbracker thanks, for the example in the video, I noted that the futures price at expiry is not equal to the spot of fuel (futures price aug is $2.89, spot of fuel is $3.25). Why would that be so…? since futures at expiry would normally be priced at the spot
@@WeiHanCheng You have two "moving" prices (futures prices will adjust to spot prices as the futures gets closer to expiration), so that at the moment of expiration they should be "almost" equal (there might be slight discrepancies based on costs of liquidating the hedge). However, we don't see the prices of each at expiration in this example. More importantly, you are comparing retail prices at the pump to wholesale prices for the actual gasoline which will account for differences due to taxes, profits, etc.
Margin requirements has a lot to do with the volatility of the asset. The exchange is always exposed to 1 days worth of price movement on any position. So the bigger those 1 day movements can be, the more margin they will require on that contract.
In terms of short term interest rate futures - if we expect interest rates to rise in the future, we open our position today by selling the future TODAY, and close our position in the future by buying (to reverse the pre-existing sell position). What you need to understand is the inverse relationship that an interest rate future has with its underlying interest (a relationship to the effect of 100 minus x%) - so, as interest rates increase, the future thereof becomes cheaper. To relate this to your scenario, an increase in rates in the future will enable you to purchase cheaper futures in the futures, that you have already "sold" and the higher price before - if that makes sense :-)
bonds and interest rates are inversely correlated so if rates go up, bonds and stocks tend to go down. So selling short term bond futures protects against a rise in interest rates.
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Can someone help me ?? This is my problem... I am an US exporter and I am expected to receive £925,000 in 3 months’ time for the payment of some products which you sold today to an UK importer. I am concerned with exchange rate movements which might result in an effective loss in 3 months’ time. I decided to hedge the exposure... questions are: 1. Should I buy USD or sell GBP ? 2. How many contracts should I buy/sell ?? I sincerely ask your help...Beforehand, thank you very much
+Nurul Kamilah Since expectation is for cable to appreciate against dollar. You will want to hedge in the direction of the risk, which is to buy GBP contract now, if gbp does appreciate, your cash market value will decrease, however your GBP futures will increase as well. There will be a net zero effect from unwinding your futures position in 3 months time, assuming perfect hedge. Each contract size for gbpusd is 62,500. 925000/62500 = 14.8. You will need 15 contracts, although you will overhedge by a smidgen.
how can you incorporate the expectation of cable appreciating against the dollar into a bonafide hedge? to protect the downside risk of a decline in the value of sterling, one would sell -15 6B 3 months out which would offset the losses incurred if the 6B declined. please advise if I misunderstood, thanks.
so you're a delivery company and when gas price goes up, your expenses goes up but profit goes down. can anybody give me a simple calculation how it work?
In question no 4 they were asking about discrepancy s but you were explained benefits ...And I didn't get the concept of backward jaatiyon I think the answer is not reasonable....My answer is it is because of inflation or economical conditions
If he had not made the hedge, he would have saved (made a profit savings of) $130k. The hedge made a loss of $113k which means he still made $17k (profit savings [$130k - $113k]) due to the drop in gasoline prices. For it to have been a bad hedge, the gasoline prices at the pump would have had to drop significantly lower compared to the Futures prices so that he lost more than $130k.
