In the roadmap for managing resins prices, I explained that risk management is a process whose purpose is to help achieve strategic and economic objectives (e.g. price certainty, increased utilization rates, hoped-for profit margins, etc.) Hedging is part of the process, and hedges should be executed after the objectives and a risk management policy are established. The risk management policy contains procedures and authorizations, and lists and prioritizes hedging tools and strategies. Hedges are typically financial, but physical transactions are also included.
For resins, hedging tools are exchange-based and over-the-counter (between counterparties), and need not be limited to fixed-forward purchases (a.k.a. "pre-buys") that so many processors fear because of downside price risk. Exchange-based (and some brokered) transactions require a hedge account that may be fully funded or marginable.
What are some guidelines for setting up a hedge account? Greg Ogborn, Director of Purchasing at Sunny Delight, shares his expertise: ...