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To hedge or not to hedge? Cost is the question

Ira Kawaller, a derivatives consultant, gives some advice on adjusting hedge coverage over time, in an article on the Association for Financial Professionals (AFP) website. He discusses scenarios in which certain types of companies might be more sensitive to either rising or falling interest rates, FX rates or commodity prices. He writes: “The vast majority of non-financial treasury departments face the risk of higher, rather than lower interest rates, so this consideration may not be particularly meaningful. The concept might be more applicable, however, in connection with raw material or commodity purchases and sales.”

He adds: “By looking at the configuration of futures prices, one can readily determine whether you happen to be on the side that pays for hedging or the side that gets paid for hedging.”

Read more in the full article, here.

CTMfile take: In an uncertain economy, predicting interest rate, FX or commodity price changes isn't realistic. This article discusses how derivatives can be used to mitigate exposure risks and balancing the cost of hedging against the potential cost of not hedging.

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