Hedging Futures Price Risk Through the Futures Market & Trading Levels 1.24.2020

Read this article about hedging using futures and it will provide you an additional perspective regardless if you are a speculator or a hedger.

Written by John Thorpe, Senior Broker

Would you pay $700.00 for a one way airplane ticket between Chicago and Dallas? Economy? How about $650.00 one way between Oakland and Seattle in a middle seat? What if the price of your favorite coffee-chino increased by 50% or even 90%, how much will you be willing to pay to get that same fix? Or would you buy a lesser product? Is it rational we as consumers are forced to change our buying habits due to unexpected price increases?

A jeweler needs to buy resources (platinum, silver, gold, etc.) to make what he is going to sell, even when resources are sparse and costs are high. A farmer may be forced to sell his product when there is an abundance and prices are low. This doesn’t seem fair to the jeweler, who needs his supplies even when their costs skyrocket, or the farmer, who toils through a growing season and takes on the risks of weather, insects, and disease. These prices can fluctuate dramatically on the world market, and yet it is important for sellers to keep their prices a steady as possible to please their customer base. Perhaps where it is most apparent how important these fixed prices are is with your daily cup of coffee. A coffee roaster like Starbucks must try to control the cost of inputs even when the price for raw coffee bean fluctuates, sometimes dramatically, on the world market. If they couldn’t control the cost of the coffee, then you would not be able to depend on your daily $5.00 fix. Even Airlines are subjected to price variability in the form of costs for jet fuel. As fuel costs rise, the ticket price needs to cover the expense, and a rational increase in the price of a coach ticket should be expected; Budget prices no more. Irrational market price moves for the basic inputs of industry are long and storied throughout human history.

All of the above hedge price risk, to try to offset some of that price risk. But where do they begin?

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