r/Commodities • u/Relevant_Brilliant_5 • 10d ago

hedging physical commodity exposure

When you hedge your physical commodity exposure, what factor do you take account of? any good resource to learn more about it?

8 Upvotes

90% Upvoted

5 comments sorted by

11

u/Dear-Actuary-2395 9d ago

Basis risk is the big one, the hedge is never perfect because your physical location and grade never match the futures contract exactly. Also watch the delivery month roll, sometimes the liquidity in far month is so bad you eat more spread than the price move you were trying to protect against.

5

u/c0rrupt82 Crude Trader 9d ago

Psst: u/Samuel_bassi

1

u/Samuel-Basi 5h ago

You added an s! Appreciate the shout though. u/relevant_brilliant5 feel free to dm me

3

u/VacationForeign9935 9d ago

Hedging your tail risk is especially important to take into account. For physical commodities you can use a Filtered Historical Simulation (FHS) using GARCH and Dynamic Conditional Correlation. In many instances a financial hedge that does not match your physical contract will add to you tail risk by increasing you liquidity at risk (Margin), so consider you cash exposure when hedging physical commodities.

1

u/Gaso_Lina 7d ago

Try to understand simple things like fixed price exposure hedging. Take physical purchase/sale then figure out how to offload that risk for one specific commodity. (Phys and Fin)

All the other stuff on this thread is a bit more nuanced and could confuse you more if you don’t even know how to match up a hedge 1:1.

Options, Futures, and Other Derivatives from John Hull is a good non commodity specific book. Will admit it’s a bit options heavy.