|
Trader's Tip
Quotes & Charts
Quote Search:
Market Specific Links:
Indices/Minis
Grains
Currencies/Forex
Financials
Food/Fiber/Softs
Metals
Energy
Meats
|
Special Message from Our Author
|
Think you can trade? Prove it.
Sign up for Complimentary Demo Account from Arc Capital Management and enter the Tournament of Champions, forex edition. Arc Capital Management is an Independent Introducing Broker providing institutional clients, professional traders and financial investors with the means to help you achieve your goals.
Go here for details.
|
|
Today's Featured Article
We have seen energy and grain markets as well as all commodity markets as a whole do some interesting things lately. With the increase of non-commercial market participants, such as hedge funds, and the injection of vast sums of institutional money into the markets, trading volatility has increased significantly. With their ability to take longer-term positions and to withstand the financial pressures to sell, commodity markets have been supported beyond shorter-term fundamentals in some instances. The prior months have shown us how quickly attitudes and perceptions can change once this money begins to exit markets. It does not take long for what seems to be a
never-ending rally to turn into an unending sell off. In the recent weeks, markets that seemed to be battle tested and felt to have unlimited upside have changed. When money is exiting markets, fundamentals take a greater role after the correction and vise versa. Now, after some premiums have been taken out, and money is coming in and out of commodity markets, it is hard not to wonder what the next move is even though you may be seeing a market signal that you would not have hesitated on just a few short weeks ago. This can be seen in all commodity markets. When searching for ways to handle the current volatility, answers are a dime per dozen with everyone thinking that they know the
answers in the realm of the new commodity craze. However, in times like these, although we have never seen them before, it is important to follow the cold hard facts and manage your risk. How one manages their risk varies. There are numerous factors to be considered including personal risk tolerance. The volatility that we have been experiencing has opened communication channels for many risk management discussions. In particular, hedging has been the recent topic with the majority of my clients and one that is very important.
Volatility and the need for hedging will only continue in the next couple months. Our double top in corn formed in June followed by viscous selling from funds and specs alike has left many traders on the sidelines in caution. An argument can easily be made that most of the volatility is being fueled by inexperienced fund managers causing market prices to fluctuate irrationally with no basis for fundamentals. In daily meetings and roundups, fundamentals are always the core of our discussions this time of year but seem to have unexpected impacts on the market. Ethanol, crude, crop conditions, exchange rates...the facts of the market are having difficulty explaining a 40c move in corn or
an 80c move in beans. As proof of irrational grain pricing take a look at the month to month market spreads.
|
|
Metal markets have shown an over exuberance in market action as well. Since gold topped out in July, and previously in March, the market has dropped over 20% while the rally in the greenback has been half as much. There are certainly other factors to look at but the bottom line is that many markets have produced volatility levels that just don't add up. Some 'analysts' are looking at these conditions as incredible opportunities. But beware, it could also be a sign that there is something within the infrastructure of the markets that needs to be adjusted.
The majority of the clients that I work with are commodity producers or end users that are hedging against market risk. In the recent years hedging has always been on the upward trend among market participants due to the fact that commodity markets are becoming more and more volatile as time goes on. Since the recent commodity highs established in July, March for gold, followed by the recent sell off that we are experiencing, inquires from those who have never hedged and those who have done so on a smaller scale have increased tri-fold, as they should. Cash flows and growing opportunities are greatly inhibited by the volatile swings that we have been seeing. When it is time to expand
ones business in markets like these, those who have not implemented a hedging strategy could experience severe cash flow constraints while their competitor is able to take advantage of acquisition opportunities to enhance volume and profitability. Implementing a hedging strategy can facilitate predictable, stable earnings, smooth volatility, release capital formerly held against commodity price movements, assure earnings to support capital expenditures, and enable the corporation to maintain and expand its execution plan during adverse market movements. However, unforeseen costs can be incurred by those who enter hedging structures uninformed. When a producer or end user is looking
at hedging, it is extremely important to choose the right strategy and to make sure that all of the ins and outs are understood. Everything from how particular hedging structures settle, how they are priced, how they work in relation to the market, and if margin is required or not should be evaluated in detail. When evaluating hedging, producers and end-users, as well as their bankers and investors, do not want their companies to hedge away any of their upside potential, yet they do not want to see too much downside exposure either. To choose the right strategy, a producer or end-user must carefully consider its current and potential risk in terms of how price fluctuation will affect their
bottom line, then, make a decision as to what strategy best suits their business model.
|
|
|
A Word from a Fast Break Sponsor
Advertise With Us
Learn to LEVERAGE the Markets
Every trader is looking for a way to gain enhanced opportunity and potential. Our COMPLIMENTARY options trading manual can show you how! This comprehensive reference manual defines the basic structure and application of most contemporary option strategies. You'll learn the basics of options trading and pricing, basic trading strategies and actual volatility trading examples. Get your COMPLIMENTARY copy today!
|
|
|
As I mentioned previously when making the decision to hedge there should be a number of things considered prior to making the step. First off keep in mind that not hedging due to the complexities and uncertainty of the market is the most risky and speculative approach to take. There should always be some kind of risk management strategy in place, even if it is small in scale. Exposing ones entire well being to market movements is an extremely risky way to operate. When evaluating the right hedging structure one should evaluate the following:
- How much price risk is the company or individual willing to accept?
- How much is the company willing to spend up-front and over time to hedge price risk?
- What is the specific goal behind the company's price risk management strategy, and how does it fit into the company's larger strategic goals?
- What time horizon is to be used for all hedging activity?
- What hedging instruments are considered an acceptable means for mitigating risk?
- What are the appropriate risk limits for all hedging activity?
When deciding on a particular hedge a company or individual should also consider there trading experience and exactly what hedging options are available. Futures exchanges such as CBOT, NYMEX, or ICE should be evaluated in reference to exactly what is being hedged. Hedging through the use of futures or options should also be looked at and decided upon in reference to a company's or individuals risk tolerance. Also, the use of "over the counter" hedges should be evaluated as well.
When looking into implementing a hedging program or revitalizing your old one there are some steps that can be taken to shed some light on the process. There are many sources of information available to you on the Internet. The exchange websites are a great source to locate types of different structures and examples of how they are used. Another good idea is to establish a relationship with hedging counter-parties who will be willing to guide you through the process and share market intelligence. Also, not all companies or individuals are able to utilize an in house risk management department as larger companies do to properly evaluate commodity markets and design and implement hedging
programs. In regards to this many small to medium sized companies or individuals with moderate volumes elect to hire a fee-based market professionals to execute on their behalf. Reputable market professionals have established relationships with major market-makers and extensive knowledge of commodity derivative instruments, to ensure accurate, timely, and cost efficient fills.
With any route that is chosen it is important to do your homework and to make sure that you completely understand the hedging structures you are entering into.
|
|
About the Author
| Joaquin Anderson
has an impressive history in the agricultural markets. He began his career with Cargill AgHorizons Marketing Services in Southeast Missouri where he became a CTA and began to learn the commodity business. He later accepted a promotion and went to work for Cargill in St. Louis, Missouri where he worked directly with producers on marketing and providing risk management products. During his time with Cargill in St. Louis he was offered the opportunity to go to work with Arc Capital Management in Dallas, Tx where his focus includes grains and energy markets. |
|
Special Message from Our Author
|
Think you can trade? Prove it.
Sign up for Complimentary Demo Account from Arc Capital Management and enter the Tournament of Champions, forex edition. Arc Capital Management is an Independent Introducing Broker providing institutional clients, professional traders and financial investors with the means to help you achieve your goals.
Go here for details.
|
|
|
