Hedging myths I - "We'll hedge when prices are heading up."

Welcome to our series where we examine different hedging myths and use heroes and heroines from Greek mythology to help teach us the truth behind each myth.

We'' learn about the treasurer in love with his own forecast, the one rolling the same boulder uphill every month-end. and the risk manager who hedges everything but his heel.

Our first myth is "we'll hedge when prices are heading up."

Who is the first hero in our series where treasury myths meet Greek myths?

Narcissus, of course.

Narcissus was a youth so beautiful that everyone who saw him fell in love with him — and he scorned them all, including the nymph Echo, who pined for him until nothing was left but her voice. For that cruelty, Nemesis, the goddess of retribution, led him to a still pool. There he fell for his own reflection, never realising the face was his, couldn't stop looking at it and wasted away on the bank. Where he died a single flower grew — the narcissus, named after him.

He fell in love with a reflection of himself and mistook it for something real. Plenty of treasurers and risk managers do the same with their market view. They hedge when they're bullish, hold off when they're bearish, and call it strategy. It isn't - it's really speculation. If your hedge ratio or timing moves with your opinion of the forward curve, you're not managing risk — you're trading.

Like Narcissus, the danger isn't the market — it's falling in love with your own reflection of it. Hedge to your policy, not your view.

Next myth: "We'd rather stay flexible — hedging caps our upside."

Any guesses which hero this is? Read the next article to find out.