Last time, we discussed the most effective means for processors to hedge forward resins costs: outright purchases of physical supply or futures in polypropylene or polyethylene or protective purchases.
Outright purchases means buying (locking in) forward prices to eliminate price risk; protective purchases means buying options in crude oil futures or ETFs to limit price risk. (Crude oil options are a proxy for resins options until they become available in the futures market, though processors could request resins options from their suppliers—to their mutual benefit.)
There is a third hedging choice that processors may take and most processors only take: do nothing.
"Do nothing" means purchasing physical supply for short-term processing needs only. It is considered the safe choice, but do-nothing actually equates to taking the position that:...