Marvelous. This and many of your videos are invaluable and deserve repeated watching. I just can’t thank you enough. I’m sure I speak for many viewers.
Thank you very much for this video Kevin! It must have been hard work making this video. This video helped me understand what fuel hedging is, and what "long" and "short" means in this context.
Absolutely the best best best video. This is what you call explaining, I've been watching so many videos and they are too complicated to really understand, what the mechanism is. Super.
wow huge THANK YOU. I've been going over my head with this topic, watched numerous videos but still always ended up getting confused with how buy what and how much. This video helped a lot.
Could u please explain. the part of futures contract. when we. initially paid $2.8974 for a contract and it closed a $2.6813 and that's a $0.2161 difference. but as I understand we paid a lower price for the futures contract and if the price rises we should be secure as we already agreed to pay a lower price which is fixed and as for the change in closing price. why should we be bothered about that?? confused here.
Hey Kevin, I fully understand the hedge and that it was a good one because it mostly reduces the risk(risk isn’t defined as the possibility of having losses it is defined through out uncertainty so risk can be a loss or a profit) but when you compare it to a forward hedge, do you take into account the cost or expenses for the initial margin and would then a forward hedge with a bank be less expensive for the company ? I am really not sure how to evaluate the initial margin in terms of how efficient a hedge is and how to treat that cost. I hope you will reply soon and thanks in advance! :)
You are definitely correct that the margin requirements reduce the effectiveness of the hedge. For firms that have easy access to forward contracts with reasonable fees, those can be more effective as the forward doesn't have the same issues of intermediate cash flow swings (both in the initial margin and the mark-to-market adjustments).
Hi Kevin, thanks for the nie video. Question: from the moment that you saw that the market in backwardation, why do you want to hedge against an increase in the gas price?
I think the answer would be that we cannot predict the market and the current figures show backwardization which puts us in a better position to hedge on that contract which is lower is price and to avoid price volatility plus cash flows can be determined. Im thinking if the current spot rate is high and the future rate is low, that gives us a better position to secure our financial position.
I think this is not hedging the risk, in the detail I write below, what I understand is that the contract was based on speculation. and that why if there is a change in the price agreed and the change in the closing price, high or low, would generate a profit or loss.
yes it can be done at any time, you will offset the position on the same contract, on the same exchange. So if you buy 1 rb dec 18 expiration, then you would sell 1 rb dec 18 exp to close.
because the 90000 is what actually used in each month, 84000 is for the 2 future contracts. Fuel saving does not matter by future contract but by the actual price of gas and amount used by the company.
Though the gain over the gas value was 17k odd, he paid 68k as IM at the beginning, so what about that? Is that like a deposit which he ll get back after the contacts closure or that's gone ??
U r right Rakshith. The IM is like a deposit. You will receive it at the end of the contract. But you have to consider the interest forgone on the IM to arrive at Complete profitability of the contract or for any other decision making purpose.
When you mention Distribution you are talking about Carrying Costs, right? I thought that Transportation was not a carrying cost, as Quantity, Quality, TIme , and Location (Where you will be picking it up from) are predetermined for Commodity Forwards that go to completion. At least thats what Kaplan is teaching. 😅
Each Front Month expires, so you get to re-use that margin. So there is no use for that 3X Margin as you say, unless you are dong 3 months simultaneously, which you don't say is done, and your example shows that you are rolling over the contracts anyway, to hedge current monthly prices for 3 months.
The calculation shown at question 6 shows that in fact he did buy in total 6 contracts at the start of the hedge: 2 for each month which he wanted to hedge. At the moment of buying these 6 contracts is it necessary to provide the initial margin for each contract. And he seems to hold on to these contracts until their expiry date. So in this case is it not possible to re-use the margin, as the position is not being rolled forward.
The problem with story problems is its not usually your story.. however if you file bankruptcy twice house burns twice.. what would you do to try to refinance if your nail tecks husband with 3 kids offers to help during his grieving when you have all that plus a surprise grandchild in the way.. you would play let's make a dealership.. I could be wrong long or short story problem... Fast track futures are lead or unleaded by supply and I demand... unless you get cardi offset and Nikki Manged.. being a former 1099 understanding this is cryptocurrency ish.
+Jack Linton This video was made a few years ago and I probably just made up the initial/maintenance margins. However, currently, initial margin (performance bond) is set at 110% of the maintenance margin (performance bond) level. So, if maintenance was set at $8500, the initial would be $9350.
Hedge Formula has just hit the markets and it’s starting to make quite of a noise in the trading community.Details our post>> www.cotraks.com/SH2O Many have asked us if this is any better or worse than the previous version, or simply another gimmick to make traders spend more money. Let’s clear the obvious first, Hedge Formula is in no way a scam and we can assure you that this company is only here to help your trading career.*
so you're a delivery company and when gas price goes up, your expenses goes up but profit goes down. can anybody give me a simple calculation how it work?
In terms of short term interest rate futures - if we expect interest rates to rise in the future, we open our position today by selling the future TODAY, and close our position in the future by buying (to reverse the pre-existing sell position). What you need to understand is the inverse relationship that an interest rate future has with its underlying interest (a relationship to the effect of 100 minus x%) - so, as interest rates increase, the future thereof becomes cheaper. To relate this to your scenario, an increase in rates in the future will enable you to purchase cheaper futures in the futures, that you have already "sold" and the higher price before - if that makes sense :-)
bonds and interest rates are inversely correlated so if rates go up, bonds and stocks tend to go down. So selling short term bond futures protects against a rise in interest rates.
I am newbie and trades with GDMFX,I am seeing a lot of endorsement here but im a happy with my broker and I feel safe knowing that I am dealing with a registered firm.
Hi, may I ask why are we comparing the price we buy the futures at vs the price it closed at? That seems to be for speculation purposes rather than hedging.. please correct me if I am wrong ... i.e. is hedging with futures about the hedging of the current spot vs futures price OR spot movement vs future price movement?
@@kevinbracker thanks, for the example in the video, I noted that the futures price at expiry is not equal to the spot of fuel (futures price aug is $2.89, spot of fuel is $3.25). Why would that be so…? since futures at expiry would normally be priced at the spot
@@WeiHanCheng You have two "moving" prices (futures prices will adjust to spot prices as the futures gets closer to expiration), so that at the moment of expiration they should be "almost" equal (there might be slight discrepancies based on costs of liquidating the hedge). However, we don't see the prices of each at expiration in this example. More importantly, you are comparing retail prices at the pump to wholesale prices for the actual gasoline which will account for differences due to taxes, profits, etc.
Margin requirements has a lot to do with the volatility of the asset. The exchange is always exposed to 1 days worth of price movement on any position. So the bigger those 1 day movements can be, the more margin they will require on that contract.
Can someone help me ?? This is my problem... I am an US exporter and I am expected to receive £925,000 in 3 months’ time for the payment of some products which you sold today to an UK importer. I am concerned with exchange rate movements which might result in an effective loss in 3 months’ time. I decided to hedge the exposure... questions are: 1. Should I buy USD or sell GBP ? 2. How many contracts should I buy/sell ?? I sincerely ask your help...Beforehand, thank you very much
+Nurul Kamilah Since expectation is for cable to appreciate against dollar. You will want to hedge in the direction of the risk, which is to buy GBP contract now, if gbp does appreciate, your cash market value will decrease, however your GBP futures will increase as well. There will be a net zero effect from unwinding your futures position in 3 months time, assuming perfect hedge. Each contract size for gbpusd is 62,500. 925000/62500 = 14.8. You will need 15 contracts, although you will overhedge by a smidgen.
how can you incorporate the expectation of cable appreciating against the dollar into a bonafide hedge? to protect the downside risk of a decline in the value of sterling, one would sell -15 6B 3 months out which would offset the losses incurred if the 6B declined. please advise if I misunderstood, thanks.
In question no 4 they were asking about discrepancy s but you were explained benefits ...And I didn't get the concept of backward jaatiyon I think the answer is not reasonable....My answer is it is because of inflation or economical conditions
If he had not made the hedge, he would have saved (made a profit savings of) $130k. The hedge made a loss of $113k which means he still made $17k (profit savings [$130k - $113k]) due to the drop in gasoline prices. For it to have been a bad hedge, the gasoline prices at the pump would have had to drop significantly lower compared to the Futures prices so that he lost more than $130k.
Your channel is the best place to learn about trading. Thanks for your valuable work!
You're welcome!
Marvelous. This and many of your videos are invaluable and deserve repeated watching. I just can’t thank you enough. I’m sure I speak for many viewers.
Thank you very much for this video Kevin! It must have been hard work making this video. This video helped me understand what fuel hedging is, and what "long" and "short" means in this context.
Absolutely the best best best video. This is what you call explaining, I've been watching so many videos and they are too complicated to really understand, what the mechanism is. Super.
Thank you! Very informative, detailed and concise.
Wow, this was a very informative video! Explained in a very understandable manner. Thank you very much!
Thank you for the content Kevin! Appreciate what ur doing
After watching other videos about futures (derivatives). This one is so easy to understand. Thank you
what a great presentation. you made it so easy to understand
Fantastic video !!! Thank you for explaining it so well.
Thank you so much Kevin. Brilliant explanation.
wow huge THANK YOU. I've been going over my head with this topic, watched numerous videos but still always ended up getting confused with how buy what and how much. This video helped a lot.
Exactly! So many people take high risks and lose it all. It's a game of consistency.
Thank you Kevin! great explanation.
Beautifully explained! Thanks a tkn
Very clear video! One thing: You forgot to mention about the leftover 6000 gallons that would have reduced the loss on the hedge
Great refresher!Many thanks
Very well done. Thank you!!
Thanks for such informative clip!
very clear, great video, thanks a lot!
Very well explained
professor
Great explanation, thankyou!
very well explained!!!. thanks so much!
Thanks because I didn't know what hedging was until now.
Thank you. Very helpful.
Perfectly explained!
Really well explained!
Awesome example man thank you
nicely explained !! Thank you
Thank you very much Kevin!
Thank you. Makes sense now.
very good explanation
Great summary
It's easy to understand thanks for that ,could you make another video on hedge fund to us
thank you so much
Can you please explain the same including the concepts of optimal hedge ratio?
Excelent!
Thank you for this video! Tremendously helpful!!!!!!
really useful, thank you very much
Thanks so much
Thank you
Thank you!!
Could u please explain. the part of futures contract. when we. initially paid $2.8974 for a contract and it closed a $2.6813 and that's a $0.2161 difference. but as I understand we paid a lower price for the futures contract and if the price rises we should be secure as we already agreed to pay a lower price which is fixed and as for the change in closing price. why should we be bothered about that?? confused here.
Really good!!! Risk eliminated, some profit made anyway
Thank-you!
Thank you 😊
nice video ..... pls make one for Hedge Ratio too. thanks
Hey Kevin, I fully understand the hedge and that it was a good one because it mostly reduces the risk(risk isn’t defined as the possibility of having losses it is defined through out uncertainty so risk can be a loss or a profit) but when you compare it to a forward hedge, do you take into account the cost or expenses for the initial margin and would then a forward hedge with a bank be less expensive for the company ? I am really not sure how to evaluate the initial margin in terms of how efficient a hedge is and how to treat that cost.
I hope you will reply soon and thanks in advance! :)
You are definitely correct that the margin requirements reduce the effectiveness of the hedge. For firms that have easy access to forward contracts with reasonable fees, those can be more effective as the forward doesn't have the same issues of intermediate cash flow swings (both in the initial margin and the mark-to-market adjustments).
Thank you!!!!
Thank you so much sir....🙏🙏😊
thank you
Hi Kevin, thanks for the nie video.
Question: from the moment that you saw that the market in backwardation, why do you want to hedge against an increase in the gas price?
a good question, can someone prepare an answer ?
I think the answer would be that we cannot predict the market and the current figures show backwardization which puts us in a better position to hedge on that contract which is lower is price and to avoid price volatility plus cash flows can be determined. Im thinking if the current spot rate is high and the future rate is low, that gives us a better position to secure our financial position.
Awesome
They should teach us this stuff in school.
NIce. Thanks.
Thanks
I think this is not hedging the risk, in the detail I write below, what I understand is that the contract was based on speculation. and that why if there is a change in the price agreed and the change in the closing price, high or low, would generate a profit or loss.
very good explanation. I like the example. I'm wondering how people exit futures or cancel them. Can it be done at any time? etc.
yes it can be done at any time, you will offset the position on the same contract, on the same exchange. So if you buy 1 rb dec 18 expiration, then you would sell 1 rb dec 18 exp to close.
can you do an examples of heding on options contract .
Why are you using 90,000 instead of the contracts u bought wich was around 84000? Thanks in advance
because the 90000 is what actually used in each month, 84000 is for the 2 future contracts. Fuel saving does not matter by future contract but by the actual price of gas and amount used by the company.
its just an example. he could have used 84000 but that doesn't add the spice in the question.
Yes ,Nice
Though the gain over the gas value was 17k odd, he paid 68k as IM at the beginning, so what about that? Is that like a deposit which he ll get back after the contacts closure or that's gone ??
U r right Rakshith. The IM is like a deposit. You will receive it at the end of the contract. But you have to consider the interest forgone on the IM to arrive at Complete profitability of the contract or for any other decision making purpose.
U rock
When you mention Distribution you are talking about Carrying Costs, right? I thought that Transportation was not a carrying cost, as Quantity, Quality, TIme , and Location (Where you will be picking it up from) are predetermined for Commodity Forwards that go to completion. At least thats what Kaplan is teaching. 😅
Do you have to pay the initial margin amount for each month you want to hedge?
+Víctor Cortés Yes, plus maintenence margin and if there is more volitility the exchange can increase margins to reflect the increased risk.
Each Front Month expires, so you get to re-use that margin. So there is no use for that 3X Margin as you say, unless you are dong 3 months simultaneously, which you don't say is done, and your example shows that you are rolling over the contracts anyway, to hedge current monthly prices for 3 months.
The calculation shown at question 6 shows that in fact he did buy in total 6 contracts at the start of the hedge: 2 for each month which he wanted to hedge. At the moment of buying these 6 contracts is it necessary to provide the initial margin for each contract. And he seems to hold on to these contracts until their expiry date. So in this case is it not possible to re-use the margin, as the position is not being rolled forward.
The problem with story problems is its not usually your story.. however if you file bankruptcy twice house burns twice.. what would you do to try to refinance if your nail tecks husband with 3 kids offers to help during his grieving when you have all that plus a surprise grandchild in the way.. you would play let's make a dealership..
I could be wrong long or short story problem...
Fast track futures are lead or unleaded by supply and I demand... unless you get cardi offset and Nikki Manged.. being a former 1099 understanding this is cryptocurrency ish.
Shouldn't the maintenance margin be 8600 - it's closer to and just under 75% of the initial margin or does it have to be multiples of 500?
+Jack Linton This video was made a few years ago and I probably just made up the initial/maintenance margins. However, currently, initial margin (performance bond) is set at 110% of the maintenance margin (performance bond) level. So, if maintenance was set at $8500, the initial would be $9350.
Hеre аrе just а fеw of thеееe keуyуy sеcrets inside mу INCRЕDIBLЕ traaaаding sоftwarе.==>twitter.com/d98aca65bff1e44c1/status/804699524132278272 Futurеs Hеdging Ехample
Hedge Formula has just hit the markets and it’s starting to make quite of a noise in the trading community.Details our post>> www.cotraks.com/SH2O Many have asked us if this is any better or worse than the previous version, or simply another gimmick to make traders spend more money. Let’s clear the obvious first, Hedge Formula is in no way a scam and we can assure you that this company is only here to help your trading career.*
so you're a delivery company and when gas price goes up, your expenses goes up but profit goes down. can anybody give me a simple calculation how it work?
Can someone answer me why in short term interest rate. If we expect a rise in interest rate we need to sell a futures contract?
In terms of short term interest rate futures - if we expect interest rates to rise in the future, we open our position today by selling the future TODAY, and close our position in the future by buying (to reverse the pre-existing sell position). What you need to understand is the inverse relationship that an interest rate future has with its underlying interest (a relationship to the effect of 100 minus x%) - so, as interest rates increase, the future thereof becomes cheaper. To relate this to your scenario, an increase in rates in the future will enable you to purchase cheaper futures in the futures, that you have already "sold" and the higher price before - if that makes sense :-)
bonds and interest rates are inversely correlated so if rates go up, bonds and stocks tend to go down. So selling short term bond futures protects against a rise in interest rates.
thanks so much, my exam's tmr lol!
I am newbie and trades with GDMFX,I am seeing a lot of endorsement here but im a happy with my broker and I feel safe knowing that I am dealing with a registered firm.
This assumes that hedges don't go short.
Hi, may I ask why are we comparing the price we buy the futures at vs the price it closed at? That seems to be for speculation purposes rather than hedging.. please correct me if I am wrong ...
i.e. is hedging with futures about the hedging of the current spot vs futures price OR spot movement vs future price movement?
The futures price is to take delivery of the underlying asset at a price locked in today. This can be used for either speculation or hedging.
@@kevinbracker thanks, for the example in the video, I noted that the futures price at expiry is not equal to the spot of fuel (futures price aug is $2.89, spot of fuel is $3.25). Why would that be so…? since futures at expiry would normally be priced at the spot
@@WeiHanCheng You have two "moving" prices (futures prices will adjust to spot prices as the futures gets closer to expiration), so that at the moment of expiration they should be "almost" equal (there might be slight discrepancies based on costs of liquidating the hedge). However, we don't see the prices of each at expiration in this example. More importantly, you are comparing retail prices at the pump to wholesale prices for the actual gasoline which will account for differences due to taxes, profits, etc.
How is the margin amount determined ? thank you
Margin requirements has a lot to do with the volatility of the asset. The exchange is always exposed to 1 days worth of price movement on any position. So the bigger those 1 day movements can be, the more margin they will require on that contract.
Can someone help me ?? This is my problem... I am an US exporter and I am expected to receive £925,000 in 3 months’ time for the payment of some products which you sold today to an UK importer.
I am concerned with exchange rate movements which might result in an effective loss in 3 months’ time. I decided to hedge the exposure... questions are:
1. Should I buy USD or sell GBP ?
2. How many contracts should I buy/sell ??
I sincerely ask your help...Beforehand, thank you very much
+Nurul Kamilah
Since expectation is for cable to appreciate against dollar. You will want to hedge in the direction of the risk, which is to buy GBP contract now, if gbp does appreciate, your cash market value will decrease, however your GBP futures will increase as well. There will be a net zero effect from unwinding your futures position in 3 months time, assuming perfect hedge.
Each contract size for gbpusd is 62,500. 925000/62500 = 14.8. You will need 15 contracts, although you will overhedge by a smidgen.
how can you incorporate the expectation of cable appreciating against the dollar into a bonafide hedge? to protect the downside risk of a decline in the value of sterling, one would sell -15 6B 3 months out which would offset the losses incurred if the 6B declined.
please advise if I misunderstood, thanks.
In question no 4 they were asking about discrepancy s but you were explained benefits ...And I didn't get the concept of backward jaatiyon I think the answer is not reasonable....My answer is it is because of inflation or economical conditions
當時差點說三道四
KCMO represent!
i dont get how that was a good hedge, you lost $113k on the futures....
If he had not made the hedge, he would have saved (made a profit savings of) $130k. The hedge made a loss of $113k which means he still made $17k (profit savings [$130k - $113k]) due to the drop in gasoline prices. For it to have been a bad hedge, the gasoline prices at the pump would have had to drop significantly lower compared to the Futures prices so that he lost more than $130k.
thanks for the timely feedback, saving lives
No need for sarcasm... how about that for timely feedback!
Can I have ur email ? I need advice for my assignments
lol upl has sure tanked since this vid..
mnn
not a great explanation