'Tis better to have hedged and lost than never hedged at all.

Well not ‘lost’ perhaps but finished out the money.

It’s an irony of most hedging programs that we don’t want them to be effective. This can be a hard concept to explain to senior management at times.

Many hedging programs do not hedge 100% of exposures but often follow a so-called ‘declining wedge’. In this case a portion of exposures remains unhedged.

Consider a copper purchaser that needs to buy 100 tonnes of copper every month and who has hedged 50% per month at $10k / tonne.

If the copper price is $12k/tonne for the month say, the overall cost will be $600k for the unhedged portion and $500k for the hedged portion, an overall total cost of $1.1m per month. In this case, the hedge is in-the-money by $2k.

If the copper price is $8k/tonne for the month say, the overall cost will be $400k for the unhedged portion and $500k for the hedged portion, an overall total cost of $9k per month. Here the hedge is out-the-money by $2k.

So the copper hedging ‘fails’ or ‘loses’ in the latter case but the overall purchase cost is lower by $200k – the ironically obviously preferable outcome.

Being able to clearly calculate and explain cashflow impacts of hedging programs under several potential price paths helps treasury effectively communicate risk management. Forge aHedge can easily assess and communicate cashflow-at-risk under multiple future price scenarios and hedging strategies.