1. Hedging & Futures Presented by Jonathan Truong

2. Agenda Futures Review What is Hedging What to Consider Wheat Example Gas Example

3. Review on Futures Forward contract Many players Make/take deliveries Speculating prices Open/close positions Clearing house

4. Hedging What is hedging? Future contracts to limit exposure to commodity prices Used to offset natural risk exposure on profits and expenses Not meant for income production mechanism

5. Things to Consider Hedging with future contracts Maturity Units of commodity per contract How many contracts you need Initial margins to initiate positions Maintenance margin

7. Wheat Contract Farmer Contract – sell (short) 4 Contract = 50,000 bushels @$4.50/bushel Maturity is 1 month/contract MM is 10% Notional 4(50,000*4.5) = $900,000 MM =.10*90,000 = $9,000 Baker 4 contracts/mo

8. Scenarios month 1 Bumper crop 4(50,000*4.5) = $900,000 10 contracts extra of bushels (no futures) Spot sell Assume demand was low, @$4.4/bushel Assume demand was high, @$4.7/bushel Farmer savings in contracts 4(50,000(4.5-4.4)) = +$20,000 | 4(50k(4.5-4.7)) = -$40,000 Farmer loss/savings in extras (not in futures) 10(50,000(4.4-4.5)) = -$50,000 | 10(50k(4.7-4.5)) = +$100,000 Net delta -$30,000 +60,000

9. Scenarios Drought Able to deliver partial contract for that month/all/no futures Spot deliver the rest @$5.70/bushel SituationMarginProfit (delta) Meet contract (benchmark future) $900,000($240,000) No futures$1,140,000-

10. Delivery Company Example 90,000 gallons of fuel Hedge for next 3 months 2 contracts/month x 3mo Margin is $68,850 Fuel Contract 42,000 gallons Initial margin $11,475 MM $8,500

11. Exp. Information Average price for a gallon: $3.50 What are the fuel savings? month 1 = 90,000($3.50 - $3.25) =$22,500 month 2 = $45,000 month 3 = $63,000 Gain from fuel savings = $130,000 MonthFuturesPrices 12.89743.25 22.87983.00 32.76582.80

12. How much did you lose on your futures contracts? month 1 = 84,000($2.6813 - $2.8974) = - $18,152.40 month 2 = - $39,127.20 month 3 = - $55,935.60 loss on future = -$113,215.20 MonthFuturesClosing FuturesPrice 12.89742.68133.25 22.87982.41403.00 32.76582.09992.80

13. ReviewQ. Was this a good hedge?

14. References "Hedge (finance)." Wikipedia. Wikimedia Foundation, 18 May 2013. Web. 22 May 2013. "Introduction to Hedging with Futures." YouTube. YouTube, 18 Dec. 2011. Web. 23 May 2013. Kuepper, Justin. "Speculating vs. Hedging With Futures Explained." Commodity HQ. N.p., 23 Dec. 2012. Web. 25 May 2013. "What Is the Difference between Hedging and Speculation?" What Is the Difference between Hedging and Speculation? N.p., 26 Feb. 2009. Web. 25 May 2013.. Wisner, Robert. "Principles of Hedging with Futures." MARKETING & UTILIZATION Cooperative Extension Service. Purdue University, May 2002. Web.

15. Questions?