Hi,
I have a relatively simle question on hedging strategies. The situation is Company A buys some commodity (say grain) to run its business. The company wants to protect itself from fluctuations in commodity prices by hedging it. I am interested in analyzing the pros/cons of various hedging strategies.
Futures
Pros
- liquid
Cons
- margin requirements
- contracts are standard - not customized to exact company needs
Forwards
Pros
- customized contracts
Cons
- illiquid
Options
Pros
- minimum downside, unlimited upside
Cons
- expensive
I understand the above (or am I missing anything?). I remember hearing about another hedging strategy that would involve Company A creating a joint venture with Bank B in which B would be a majority holder at 51% and all the hedging would be done through this entity. This would result in no changing margin / liability requirements for Company A. I don't remember the details and not entirely sure how this would work - if anyone heard of this type of hedging, can you please share some more information about it?
Also - are there any other hedging strategies that Company A can pursue?
Many thanks.
I have a relatively simle question on hedging strategies. The situation is Company A buys some commodity (say grain) to run its business. The company wants to protect itself from fluctuations in commodity prices by hedging it. I am interested in analyzing the pros/cons of various hedging strategies.
Futures
Pros
- liquid
Cons
- margin requirements
- contracts are standard - not customized to exact company needs
Forwards
Pros
- customized contracts
Cons
- illiquid
Options
Pros
- minimum downside, unlimited upside
Cons
- expensive
I understand the above (or am I missing anything?). I remember hearing about another hedging strategy that would involve Company A creating a joint venture with Bank B in which B would be a majority holder at 51% and all the hedging would be done through this entity. This would result in no changing margin / liability requirements for Company A. I don't remember the details and not entirely sure how this would work - if anyone heard of this type of hedging, can you please share some more information about it?
Also - are there any other hedging strategies that Company A can pursue?
Many thanks.
