Scribd Logo

Language

Upload

Welcome to Scribd!

Enjoy millions of ebooks, audiobooks, magazines, and more, with a free trial

Only $11.99/month after trial. Cancel anytime.

Hedging Demystified
Hedging Demystified
Hedging Demystified
Ebook226 pages1 hour

Hedging Demystified

By Tim Bishop

4/5

()

Read preview

About this ebook

Do changes in:

  • commodity prices
  • interest rates
  • foreign currency exchange rates
  • or weather

jeopardize your bottom line?

 

Finally, it's here: a practical, straightforward book on how to manage those uncertainties. It contains clear illustrations of how futures, options, and swaps work to curb risk. Written for a businessperson by a businessperson, this handbook explains:

  • The mechanics of hedging
  • How hedging protects wealth
  • How to achieve more predictable earnings amid the unpredictable
  • Specific examples of hedging
  • Hedging opportunities and pitfalls

Hedging Demystified is an essential guide to any business that deals with commodities, debt, international trade, or weather. This primer on hedging brings clarity and direction to make your business more sustainable. The e-book version comes with fully linked index, glossary, and helpful webpages.

 

About the Author: A CPA and former corporate treasurer with over thirty years of business experience, TIM BISHOP has seen hedging from all angles—as scout, strategist, tactician, trader, accountant, supervisor, and treasurer. He knows how to distill the complexities of financial risk for people who are looking for answers.

LanguageEnglish
PublisherTim Bishop
Release dateSep 15, 2014
ISBN9780985624804
Hedging Demystified
Read preview

Read more from Tim Bishop

Related to Hedging Demystified

Related ebooks

Related podcast episodes

Related articles

  • Article

    Stock Picks From Space

    Jan 1, 1970

    Stock Picks From Space
    7 min read

  • Article

    Hedge City Blues

    Jan 1, 1970

    Hedge City Blues
    20 min read

  • Article

    Short Positions... Gas Spike Whipsaws Traders

    Jan 1, 1970

    ■ Baillie Gifford has cut the annual management fee for its UK Equity Alpha fund after a difficult 12 months, from 0.55% to 0.47%, says Citywire. The £1bn fund returned 11.1% in the 12 months to the end of August, compared to a sector average of 32.2

    1 min read

  • Article

    Understanding Fuel Hedging Contracts

    Jan 1, 1970

    Most farmers would be surprised to know that the term ‘hedge’, now synonymous with investment banks and financial markets, has its origins in the 14th century when it was used to describe a fence made from a row of bushes. Therefore, to hedge a piece

    3 min read

  • Article

    Short Positions... Commodity Hedge Funds Cash In

    Jan 1, 1970

    ■ Hedge funds bullish on commodities enjoyed large returns in the first nine months of 2021 thanks to the global “energy crunch”, say Maiya Keidan and Julia Payne on Reuters. The average “global macro” commodities hedge fund (the term means they try

    1 min read

  • Article

    En Route To Action

    Jan 1, 1970

    Firms that have applied for a mutual fund licence and are awaiting in-principle approval ABIRA SECURITIES EMKAY GLOBAL FINANCIAL SERVICES PHONEPE ANGEL ONE OLD BRIDGE CAPITAL MANAGEMENT ALCHEMY CAPITAL MANAGEMENT UNIFI CAPITAL WIZEMARKETS ANALYTICS F

    1 min read

  • Article

    Desert Delight

    Jan 1, 1970

    Desert Delight
    1 min read

  • Article

    Risks…

    Jan 1, 1970

    Risks…
    1 min read

  • Article

    Activist Watch

    Jan 1, 1970

    US package delivery firm FedEx’s share price had its biggest one-day gain in around 36 years after the company announced it was increasing its quarterly dividend by 53% as part of a deal with activist investor D.E. Shaw, says MarketWatch. The D.E. Sh

    1 min read

  • Article

    Currency Hedges Serve FMI International Well

    Jan 1, 1970

    It's been a rough half-decade for international stocks. Over the past five years, the MSCI EAFE index, a proxy for stocks in developed foreign countries, has returned an annualized 2.1%. That return reflects stock returns as well as currency movement

    1 min read

  • Article

    Stock Market Today: Energy Soars as Russia-Ukraine Volatility Resumes

    Jan 1, 1970

    American stock markets were volatile again Monday as investors processed a laundry list of new developments in Russia's invasion of Ukraine. Among those events: The U.S. and European nations have largely coalesced around the Ukrainian cause, providin

    2 min read

  • Article

    Activist Watch

    Jan 1, 1970

    Hedge fund Starboard Value is backing a bid to buy US department store chain Kohl’s for $9bn, says The Wall Street Journal. A group led by Acacia Research – a Starboard-controlled listed company with a market value of just $215m – is offering $64 per

    1 min read

  • Article

    Insurance Quote

    Jan 1, 1970

    Quotation supplied by Lancaster Insurance Services Web: lancasterinsurance.co.uk Tel: 01480 809176 Example quote: £209.93, or £227.93 with Agreed Value. Quote based on a 45-year-old marketing manager, access to another car, no claims or convictions,

    1 min read

  • Article

    Insurance Quote

    Jan 1, 1970

    Quotation supplied by Lancaster Insurance Services Web: lancasterinsurance.co.uk Tel: 01480 809176 Example quote: £102.06, or £120.06 with Agreed Value. Quote based on a 45-year-old marketing manager, access to another car, no claims or convictions,

    1 min read

  • Article

    Striking The Right Note

    Jan 1, 1970

    Striking The Right Note
    1 min read

  • Article

    Foolish Takeaway

    Jan 1, 1970

    The outlook for financials has perhaps not been so uncertain since the GFC (and before that, when, in the early 1990s, Westpac briefly flirted with oblivion). The “banks for yield” trade has been put on hold, but if they can recover from the virus la

    1 min read

  • Article

    Insurance Quote

    Jan 1, 1970

    Quotation supplied by Lancaster Insurance Services  Web: lancasterinsurance.co.uk Tel: 01480 809176 Example quote: £89.97, or £107.97 with Agreed Value. Quote based on a 45-year-old marketing manager, access to another car, no claims or convictions,

    1 min read

  • Article

    Will China help?

    Jan 1, 1970

    Mines are starting to reopen, with coal and open-cast mines allowed to operate at 100% and the rest at 50%. This is subject to the mines being able to implement safety measures to manage the spread of Covid-19. The problem for the industry is demand.

    1 min read

  • Article

    5 Gold Stocks Worth Their Weight

    Jan 1, 1970

    It's been a tough stretch for gold, and by proxy, gold stocks.  Gold has traditionally been considered a safe haven for investors in times of recession as it provides an effective hedge against inflation. Prices in the U.S. are rising at their fastes

    1 min read

  • Article

    Insurance Quote

    Jan 1, 1970

    Quotation supplied by Lancaster Insurance Services Web: lancasterinsurance.co.uk Tel: 01480 809176 Example quote: £149.34, or £167.34 with Agreed Value. Quote based on a 45-year-old marketing manager, access to another car, no claims or convictions,

    1 min read

  • Article

    Organ Grinder

    Jan 1, 1970

    Every body part is graded according to size, condition, blood type and rarity, with some requesters demanding organs that fulfil a particular criterion. Their condition (and price) steadily deteriorates in your hold, though certain organs improve the

    1 min read

  • Article

    5 Super Stocks to Stave Off Sizzling Inflation

    Jan 1, 1970

    Investors spooked by the latest red-hot readings on inflation should know that a handful of market sectors have historically not only afforded them safety amid rapidly rising prices, but have actually delivered outright outperformance.  True, every s

    1 min read

  • Article

    Online Fair

    Jan 1, 1970

    An all-day event from 9am @thewealdenbazaar Visit the Wealden Bazaar Instagram account at 9am and browse the vintage traders who will be announced in lists in several posts the day before the market. Each list includes the trader’s Instagram name, w

    1 min read

Related categories

Reviews for Hedging Demystified

4/5

2 ratings1 review

What did you think?

Tap to rate

Review must be at least 10 words

  • 4/5
    Though I was first introduced to Tim Bishop by the travelogue Two Are Better, which he and his wife Debbie wrote as newlyweds on their coast to coast bicycle honeymoon, Tim requested me to read and review his other book Hedging Commodity Price Risk. Quite different stuff to put your teeth in. Bishop's target audience is owners or managers in SME facing the challenges of changing commodity prices, interest rates, weather conditions. Hedging instruments to offset or mitigate these risks, and accompanying accounting rules can be perceived as too difficult or understandable for mere mortals. To be honest, that part of business economics wasn't my favorite during my master's study.Hedging Commodity Price Risk is quite accessible, without simplifying or bypassing tough topics. Bishop deals with the several risks you run as business. Then the concept of hedging and the several instruments are dealt with. Specific examples in tables or illustrations help to understand the effects. Pitfalls and opportunities, stakeholders and the relationship you need with them, accounting principles and consequences of hedging for tax filing.A practical book, with a glossary included and lots of references to web sites providing background information, up to date rates and conditions. The book's written from a US perspective and (relatively) small business in mind. Readers from abroad need to seek local advice on country specific rules and details. The book's a great source of information from a seasoned practitioner.

Book preview

Hedging Demystified - Tim Bishop

HEDGING

DEMYSTIFIED

How to Balance Risk

and Protect Profit

Tim Bishop

Open Road Press logo

WHAT OTHERS ARE SAYING

Marty White, Retired Audit Principal, a regional CPA firm

I’ve witnessed Tim Bishop’s expertise and professionalism for years. As the partner in charge of auditing the company where he ran a mission-critical hedge program, I know he has the knowledge and skill to explain a complex topic like hedging in an understandable way. I read this book and it does just that.

Bob Moore, Chairman and CEO, Dead River Company

We had the benefit of Tim’s unique skills, perspective and financial advice for many years. In a phrase, Tim has been there, done that. This is a comprehensive and useful book, one which will truly assist specialized financial managers as well as operators who face commodity price and supply risks.

Heather Bergeron, Managing Director, Dixie Asset Management

I read Hedging Demystified and I thought it was great—so user friendly. It answers so many questions that a new face to hedging may not think to ask until it’s too late.

Joe Smith, VP, an energy marketing and distribution company

Tim Bishop capitalizes on his expertise to provide an overview of hedging of commodity price risk in a straightforward manner that doesn’t require prior knowledge or a strong financial background. This book will be beneficial to both newcomers to the subject area as well as those wanting to broaden their understanding.

Jordan Ness, Fuels Trader, Chemoil, a division of Glencore

The texts are laid out in a way that makes the relevant issues easy to understand and separate from one another in spite of dealing with an already complex topic. …I particularly enjoyed the chapter on basis, I thought the layout was excellent.

Charlie Hahn, CFO, Dead River Company

Tim Bishop has managed to take a very difficult topic and make it understandable for all. I particularly like the numerous illustrations and the ability to toggle from chapter to chapter as key topics are revisited. I will be using this book as a key reference tool.

Publisher’s Note

This publication is designed to provide helpful information about the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering professional hedging services. If expert assistance is required, the service of an appropriate professional should be sought. There is no guarantee that hyperlinks will work as intended. The publisher is not responsible for viruses, malware, or other computer scripts that may alter or destroy computer data. Readers who click on hyperlinks do so at their own risk.

This e-book was originally published in 2014 under the title Hedging Commodity Price Risk: A Small Business Perspective. In 2019, the content was published in print, at which time the former e-book title and the old red cover were retired in favor of the title and cover you see on this e-book. Certain minor content revisions were made to acknowledge the new title. Nevertheless, the copyright date for both works is 2014 because the bulk of the content and its substance remained unchanged.

Most references herein to commodity futures exchanges pertain to the CMEGroup. Other exchanges may differ. Exchange rules are always changing, so check the rules of your exchange for current information.

Copyright © 2014 by Timothy G. Bishop

All rights reserved

No portion of this book may be reproduced, stored in a retrieval system, or transmitted in any form or by any means—electronic, mechanical, photocopy, recording, scanning, or other—except for brief quotations in critical reviews or articles, without the prior written permission of the publisher.

Published in the United States by Open Road Press.

http://hedging.openroadpress.com

Library of Congress Control Number: 2019900604

Print edition ISBN: 978-0-9856248-7-3

E-book edition ISBN: 978-0-9856248-0-4

First Edition

Professionally edited by Sandra J. Judd

Cover design: tatlin.net

CONTENTS

Index: A B C D E F H I L M O P R S T V W

Table of Illustrations

Foreword

Preface

Section I: Hedging Basics

Chapter 1. The Markets

Chapter 2. Why Hedge?

Chapter 3. What Is Hedging?

Section II: Hedging Tools

Chapter 4. Futures

Chapter 5. Options

Chapter 6. OTC Instruments

Section III: Hedging Applications

Chapter 7. Forward Sales

Chapter 8. Consumables

Chapter 9. Inventory

Chapter 10. Interest Cost

Chapter 11. Currency

Chapter 12. Weather

Section IV: Hedging Risks

Chapter 13. Basis

Chapter 14. Timing

Chapter 15. Volume

Chapter 16. Counterparty

Chapter 17. Cash

Chapter 18. Execution

Section V: Hedging Wrap-up

Chapter 19. Accounting for Hedges

Chapter 20. Next Steps

Glossary

Index: A B C D E F H I L M O P R S T V W

List of Website Addresses

Acknowledgments

About the Author

Back Cover

ILLUSTRATIONS

3.1 Hedging Margin

4.1 Gasoline Futures Curve

7.1 Hedging Fixed-Price Sale

7.2 Hedging Capped Sale with Futures

7.3 Hedging Capped Sale with Options; Prices Increase

7.4 Hedging Capped Sale with Options; Prices Decrease

8.1 Hedging Consumable; Prices Increase

8.2 Hedging Consumable; Prices Decrease

8.3 Hedging Consumable; Settlement Matters

8.4 Hedging Consumable; Swap versus Option

9.1 Hedging Inventory

9.2 Wheat Futures Curve

9.3 Making Money Hedging Inventory

11.1 Hedging Currency

12.1 Hedging Weather

13.1 Hedging Consumable and Basis

19.1 Hedge Accounting: To Qualify or Not?

Foreword

As someone who has worked in the energy industry in a variety of roles for over 34 years, I have frequently been involved in activities associated with the hedging of commodity price risk. This exposure has covered a variety of job roles and applications, including over ten years as a consultant providing assistance to a range of small to large domestic and international organizations. During that time, I often observed quizzical looks and blank faces when the topic of commodity hedging was explored at more than a cursory level. Confusion was particularly evident when hedging results were explained (i.e., what happened and why?).

Tim Bishop’s book Hedging Demystified: How to Balance Risk and Protect Profit is an excellent tool for those who want or need to explore this topic in more detail, in particular, for those who have limited to moderate experience in this subject area. It’s always important to keep in mind that not hedging for whatever reason (even due to lack of knowledge or understanding) fundamentally represents a choice. The impact of a hedging program for these types of companies can be crucial to their long-term health.

The underlying rationale for hedging commodity price risk is generally well understood, essentially representing a type of insurance aimed at preventing, or at least limiting, the potential for large unexpected losses due to commodity price exposure. Although this high-level understanding is widespread, the phrase the devil is in the details certainly applies. Taking the necessary steps to implement an appropriate and effective hedging strategy consistent with the risk profile of a company and its stakeholders can be challenging. Since exposure to commodity price risk is widespread across a range of industries and geographies, the potential application of hedging is extensive.

Not surprisingly, the understanding of hedging is generally strong for practitioners, though these same people can be challenged or perhaps disinterested in communicating their understanding to others. When hedging results are worse than expected (or better than expected, though the questions are typically fewer in this scenario), the hedger’s explanation can be spiced with technical jargon, leading to more confusion than clarity. In smaller organizations, this understanding is typically concentrated in a few people. If an interested party doesn’t understand the general principles and underlying rationale and activities associated with hedging, comprehending hedging strategy and results will be much more challenging.

This is where Tim Bishop’s book fits in nicely, as it provides a broad spectrum of potential readers a strong foundation to better understand this vital topic. Although there are a plethora of books that deal with hedging, this book does an excellent job of explaining the fundamentals in a simple, conversational style that doesn’t require prior knowledge or a strong mathematical or financial background. The author provides simple and clear quantitative examples covering various commodities. These examples help enhance one’s understanding of hedging strategies and their potential implications. Lastly, his small-company experience leads to a unique focus that recognizes that the responsibilities are often shouldered by a select few individuals in a smaller company.

Although Bishop’s book can be readily understood without prior experience with hedging, there is still a substantial amount of pertinent information for readers who already have a solid understanding of the topic. He covers some of the more important and relevant facets of hedging. For example, included is a good discussion of basis risk, which can often be a major component of the underlying risk that needs to be hedged. Hedging of basis risk can pose more of a challenge than hedging the underlying commodity price risk itself. If the impact of basis risk is ignored, the hedging results can be much different than expected. This section will better equip the reader to address this issue if it is pertinent. Even if the reader is already familiar with basis risk, this section will provide a good refresher to this important subject.

Bishop also wades into the arcane world of accounting for hedg