discussion response
You must reply to at least three colleagues in a manner that extends the discussion. A simple “I agree/disagree” will not be accepted. respond in a manner that further extends the discussion.
post 1
Hedging is something that I have found very fascinating in the past and believe that it is a very important aspect of investing. Hedging is defined as an investment that is made with the intention of reducing the risk of adverse price movements in an asset. Normally, a hedge consists of taking an offsetting position in a related security. There are many different hedging strategies with different benefits and downsides. Buying call options is one very important hedging strategy to utilize. Call options themselves don’t generate financial gains in a falling market, however, they reduce losses. A call option is a contract, between the buyer and the seller of the call option, to exchange a security at a set price. This can help an investor be able to maintain that set price on a security in a time of market volatility, while also keeping the potential upside of that security if the market is to surge.
https://seekingalpha.com/article/4132044-upsides-and-downsides-of-4-popular-hedging-strategies
post 2
In todays highly globalized world, companies operate all over the world depending on where costs would be less than their domestic market. However, changes in foreign currency exchange rates can increase losses or reduce profits. Options can be a very smart strategy to implement in order to mitigate risks with foreign currency. For example, Boeing would benefit from hedging due to their global positioning. According to Junu Kim at Boeing, the companys executives request quotes with foreign suppliers and manufacturers in both US dollars and the foreign currency with hedging to negotiate savings of between five and ten percent (Kim, n.d.).
Specifically, if Boeing has a contract to pay 10 million in Japanese yen in 6 months, and they believe the yen will appreciate compared to the US dollar, they can purchase a call option to minimize the loss of the appreciating yen. If the exchange rate is currently 1 USD: 111.58 YEN, Boeing could purchase a call option for 105 YEN for 6 months. If the YEN increases to 95, Boeing could purchase 10 million in Japanese yen for $95,238.10 instead of the regular exchange price in 6 months of $105,263.16. This would be a savings of more than $10,000 USD (less the cost of the premium) which would obviously be preferable to Boeing.
Kim, J. How Treasury is supporting Boeing’s efforts to expand its global presence. https://www.boeing.com/news/frontiers/archive/2003/august/i_fof1.html.
post 3
Hedging a portfolio is something that I have had some experience in during a previous finance class. Hedging is attempting to diversify the risk out of a portfolio or at least minimize the risk to a portfolio. There are many methods to hedge the risk of a product, but the method should depend on the product. For example, if I were to try to hedge the price of coffee for a company because there is a risk of price increase due to rain patterns, I would hedge the price of coffee for a company by purchasing futures contracts on coffee now to lock in prices. However, this can be risky if it is a different industry like the oil. Oil hedging was common for airlines prior to the pandemic but now the price of hedging is getting more expensive. The article below says that the pandemic and the resulting plunge in air travel have caused airlines to largely abandon oil hedges against higher oil prices, thus making it more expensive for oil producers to lock in higher oil prices on the options market (Kennedy, C. ,2020). Premiums for the puts and calls are rising in the oil market because the risk is going up. It seems to be worth it to pay higher premiums to protect an investment in fuel but not worth it if the fuel never gets used.
References
Kennedy, Charles (2020, Oct.9) Air Travel Collapse Makes Oil Hedges More Expensive. Oil Price.com. Web. Retrieved on Nov. 5, 2020 from <https://oilprice.com/Latest-Energy-News/World-News/Air-Travel-Collapse-Makes-Oil-Hedges-More-Expensive.html>
