The Hedging Corner: It’s all about margin – Part I

05/18/2011

Ask different risk managers the primary purpose of hedging and you will get different responses depending on portfolios and company objectives: cost control, budget and forecast certainty, job and business security, competitive advantage, customer loyalty, etc. However, in my opinion, for most manufacturers, the primary purpose of hedging should be to secure and improve profit margins.

Unless a manufacturer has very patient investors, is government subsidized, or has some other unique business arrangement, manufacturers need to turn a profit, and do so reliably. With regards to hedging, this means controlling costs consistent with the way revenues are generated; i.e. the timing and type of hedges for cost control reflect the timing and nature of sales, and v.v. This is just common sense (e.g. lock in costs against fixed price sales; cap costs against floating price sales; etc.), but common sense in hedging is often violated, even by experienced hedgers, and sometimes with disastrous results....
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