43 lines
3.2 KiB
Plaintext
43 lines
3.2 KiB
Plaintext
15FOr Beginners Only
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this wide discount, the hedge is still very profitable because the price differential is ultimately
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far outweighed by the intervening price decline. Thus, the relevant question is not whether the
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futures-implied cash price is attractive relative to the current cash price, but rather whether it is
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attractive relative to the expected future cash price.
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6. The hedger does not precisely lock in a transaction price. His effective price will depend on
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the basis. For example, if the cotton producer sells futures at 85¢/lb, assuming a −3¢ basis, his
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effective sales price will be 80¢/lb, rather than the anticipated 82¢/lb, if the actual basis at the
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time of offset is −5¢. However, it should be emphasized that this basis-price uncertainty is far
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smaller than the outright price uncertainty in an unhedged position. Furthermore, by using
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reasonably conservative basis assumptions the hedger can increase the likelihood of achieving,
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or bettering, the assumed locked-in price.
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7. a lthough a hedger plans to buy or sell the actual commodity, it will usually be far more efficient
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to offset the futures position and use the local cash market for the actual transaction. Futures
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should be viewed as a pricing tool, not as a vehicle for making or taking delivery.
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8. Most standard discussions of hedging make no mention whatsoever of price forecasting.
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This omission seems to imply that hedgers need not be concerned about the direction of
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prices.
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although this conclusion may be valid for some hedgers (e.g., a middleman seek-
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ing to lock in a profit margin between the purchase and sales price), it is erroneous for
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most hedgers. There is little sense in following an automatic hedging program.
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rather,
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the hedger should evaluate the relative attractiveness of the price protection offered by
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futures. Price forecasting would be a key element in making such an evaluation.
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in this
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respect, it can easily be argued that price forecasting is as important to many hedgers as it
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is to speculators.
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■ Trading
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The trader seeks to profit by anticipating price changes. For example, if the price of December gold
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is $1,150/oz, a trader who expects the price to rise above $1,250/oz will go long. The trader has
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no intention of actually taking delivery of the gold in December.
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right or wrong, the trader will
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offset the position sometime before expiration. For example, if the price rises to $1,275 and the
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trader decides to take profits, the gain on the trade will be $12,500 per contract (100 oz × $125/
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oz).
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if, on the other hand, the trader’s forecast is wrong and prices decline to $1,075/oz, with the
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expiration date drawing near, the trader has little choice but to liquidate. in this situation, the loss
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would be equal to $7,500 per contract. note that the trader would not take delivery even given
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a desire to maintain the long gold position. in this case, the trader would liquidate the December
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contract and simultaneously go long in a more forward contract. (This type of transaction is called
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a rollover and would be implemented with a spread order—defined in the next section.) Traders
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should avoid taking delivery, since it can often result in substantial extra costs without any com-
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pensating benefits. |