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FRM: How companies can hedge commodity costs with futures

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This illustrates how a company which depends on copper as an input (e.g., a computer maker) can use copper futures contracts to hedge its exposure (the anticipation of copper spot price increases). For more financial risk videos, visit our website! http://www.bionicturtle.com
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Text Comments (12)
Vincent Porco (4 years ago)
Aryän Dz (4 years ago)
Hi David, could you please do a vidoe about Futures settlement process with a number example (Daily)? Thanks for all the great videos with math examples.
Wiwat L (4 years ago)
Thank you for the explanation. It is very helpful and is certainly appreciated.
T (5 years ago)
Very good explanation. 
koopaevan55 (6 years ago)
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Damien M (7 years ago)
Hi ! Suppose I have: Buying: 200T - supplier A (index LME) : 100T = risk - supplier B (flat rate) : 100T = no risk Selling: 200T - client A (index LME): 100T = no risk - client B (Flat rate): 50T = risk - client C (Pass trhough): 50T = no risk How many Tn are "at risk" ? Risk = 100 - 150 = - 50, so 0 Tn at risk ??? Thanks a lot !!!
Bionic Turtle (10 years ago)
yes, i sure will because i have a few posts upcoming in regard to option pricing models. Thanks for the request!
Bionic Turtle (10 years ago)
good question. On technical grounds (supply/demand), you are right, the futures price can vary. But on fundamental grounds, with shorter maturity, the futures price will move just about 1:1 (i.e., the delta of a futures is EXP[rt] which is near to 1.0). So, it's a safe place to start. Thanks, David
Bionic Turtle (10 years ago)
@indrius, not really, misses the point. Company doesn't lock-in a price to buy the copper that exactly they need to buy at exactly the time they need to buy it. The commodity underlying the future is not the same as the copper needed. That's basis risk. In practice, it's almost impossible to lock-in the future cost (unless you happen to need the copper specified in the contract at exactly the time it is delivered). Two assets, not one, they aren't the same, that's basis risk.
Indrius (10 years ago)
I'm certainly not agains this material, don't get me wrong. Also, companies don't use this thing to guess or predict price in the future. This hedge thing is a way to fix and plan expenses for the company.
pantherenebuleuse (10 years ago)
I really don't think we need simpler terms, this is already simple and clear enough, brilliant
Indrius (10 years ago)
In simpler terms: you fix price of copper you're going to buy next year at $3.80, no matter how much cost of copper goes up or down in that year.

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