Natural Gas producers can hedge against falling natural gas price by taking up a position in the natural gas futures market. Natural Gas producers can employ what is known as a short hedge to lock in a future selling price for an ongoing production of natural gas that is only ready for sale sometime in the future.
How do I hedge my futures position?
To avoid making a loss in the spot market you decide to hedge the position. In order to hedge the position in spot, we simply have to enter a counter position in the futures market. Since the position in the spot is ‘long’, we have to ‘short’ in the futures market.
What is hedging in natural gas?
Hedging reduces a company’s exposure to natural gas price risk by shifting the risk to another party with an opposite risk profile, i.e. a natural gas producer, or to traders who are willing to accept the risk in exchange for potential profit opportunities. … taking specualtive positions in the natural gas market.
Can you hedge with futures?
In the world of commodities, both consumers and producers of them can use futures contracts to hedge. Hedging with futures effectively locks in the price of a commodity today, even if it will actually be bought or sold in physical form in the future.
How does fuel hedging work?
A fuel hedge contract is a futures contract that allows a fuel-consuming company to establish a fixed or capped cost, via a commodity swap or option. … If such a company buys a fuel swap and the price of fuel declines, the company will effectively be forced to pay an above-market rate for fuel.
How do you hedge crude oil futures?
Crude Oil producers can hedge against falling crude oil price by taking up a position in the crude oil futures market. Crude Oil producers can employ what is known as a short hedge to lock in a future selling price for an ongoing production of crude oil that is only ready for sale sometime in the future.
What is the best hedging strategy?
As a rule, long-term put options with a low strike price provide the best hedging value. This is because their cost per market day can be very low. Although they are initially expensive, they are useful for long-term investments.
What is short hedge example?
A short hedge in the options market is referred to as the purchasing of a put option. For example, assume that John, a corn producer, knows he will be selling grain at harvest three months from now.
What is long hedge example?
An example of a long hedge is a situation in which a company needs to buy oil by June. The spot price of oil may be $70 per barrel, but the futures price for June delivery may be only $60. The company would choose to buy the futures contract at $60 per barrel. A long hedge is also called a buy hedge.
What is basis in natural gas?
“Basis” is a financial term and is associated with the physical transportation of a commodity from a trading hub to another point. With natural gas, basis is the contractual cost of delivering your natural gas to your local utility company from the NYMEX natural gas trading point at Henry Hub, LA.
What is a basis swap for natural gas?
Basis Swap: The exchange of a differential to the NYMEX natural gas futures contract for a published monthly index price. Fixed-for-Float Swap: The exchange of a fixed price for a published monthly index price. Swing Swap: The exchange of a fixed price for a published daily index price.
What is a natural gas swap?
A natural gas swap is an OTC contract in which two parties agree to exchange periodic payments for natural gas. … Natural gas swaps can be traded bilaterally (direct between two counter-parties), via an OTC broker or on an electronic platform such as ICE.