It is not uncommon for people to challenge the whole concept of hedging. Why create procedures, add the cost of a Hedging Desk, software, broker fees etc. Why do it, if prices are always going to increase? Since our sales and purchases are going to match, in the long run we are not going to lose money, and we can cut on costs, so away with the whole thing! Alternatively, we could actively manage our risk and take a position to make money instead of ensuring that we do not lose. Not hedge our purchases when we believe prices will go up, not hedge our sales when we believe prices will go down.
If only it was that easy! Let's look at the first option, which is to forego the whole idea of hedging. We are naturally hedged, more or less, right? Nothing can go wrong. But it will. You see, prices do fluctuate significantly, even in shorter periods. Customers will tend to book their metal in the dips. Suppliers, when they have the option to set the pricing date, will ask for it on the peaks. Not everyone, not every time, and they will
certainly not choose the "perfect" moment always, but this is creating a bias and letting the company on the whim of its counterparties' skill (or luck). In simpler terms: On price rallies, sales tend to be slower.
On price corrections, sales are higher. Purchases usually cannot be immediately adjusted and often are affected in the wrong direction – when it is the supplier who has the choice. But what if we limit the options of the customer or supplier, one might ask? We can certainly do that, but we will lose many of
them to competitors who are more flexible. You have to satisfy the needs of your customers…
Read more >
