Over on Supply Chain Management Review's blog, Bob Rudzki does a good job of graphically capturing the elements of different hedging strategies. Granted, not all of these strategies are available for metals, energy and other buyers unless they're dealing in an exchange traded commodity -- or a financial instrument that can be negotiated via a private-party transaction. But for steel and other contracts, Bob's work is a good primer. In the post, he explains fixed-price swaps, which, in his words, allow companies to "lock in a known price regardless of what happens to the market price." Call options, in contrast, provide a form of insurance by providing a "ceiling beyond which their price will not rise." And zero-cost collars often involve the buying and selling of both put and call options to ensure "that the price paid falls within a price 'band'”. All in all, a good little primer on some of the hedging strategies available. His graphics will be helpful in understanding the concepts for those who have not traded options and futures before.
- Jason Busch