Profitable Plastics: The forward curve


As discussed earlier in Profitable Plastics, the purpose of managing resin price risk should be to improve profit margins. For processors, improving profit margins means hedging resin costs consistent with product prices and risks. But how (and how best) to hedge resin costs? That topic will be much discussed in Profitable Plastics. For now, some front-end basics...

What is a resin cost hedge?
A resin cost hedge is protection against 1) financial loss in an existing physical purchase or 2) a higher price than acceptable in a future physical purchase. Hedges are usually financial, and cheaper and less risky, than outright physical purchases. Hedges should protect next month forward purchases, not short-term (current month) needs.

[Aside: Hedging is often associated with options since options were created as hedging tools. For a defined cost and limited risk, options allow buyers and sellers to create positions that exactly meet their hedging needs and market outlook.]...
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