The Hedging Corner: Hedging Rules – Part I

06/02/2011

Manufacturing requires a plan. You don't go about it haphazardly. Similarly, hedging is most effective and beneficial with a management-approved plan in place (i.e. Rules) before any hedges are executed. Once the Rules and a qualified person or team is tasked with implementation, hedging is fairly routine and the risk of uncontrolled costs, weak margins, conflicting strategies, second-guessing, and beginner-hedger mistakes is minimized.

Further, the stronger the risk management team and the clearer the Rules, the more competitive and profitable the manufacturer is because hedging supports the manufacturer's objectives. It does not conflict with them. Hedging enables manufacturers to spend less time worrying about costs, profit margins, customer good will, and such, and instead spend more time on product development and improvement.

Hedging rules should specify what to hedge, how far forward to hedge, approved hedging tools and strategies, authorizations, when hedges may be closed, reporting requirements, etc. The Rules should be clear and concise, and approved by upper management. They should also be relatively easy to establish since they reflect a manufacturer's risk tolerance and strategies....
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