Commodity Hedging Strategies

A hedge is a means of protection or defense against a financial loss. For producers or consumers of energy commodities, hedging is vital for establishing a comfortable range of uncertainty around major revenue or cost items. Hedges can come in the form of contracting at specific prices and volumes or through the use of futures contracts on exchanges or trading platforms. Hedges can also be found naturally within portfolios depending on the correlation between various asset values within a portfolio. L.E. Peabody & Associates, Inc. has the experience and tools needed to help clients understand the risk around unknown purchases and sales of energy commodities and to establish hedging strategies based on clients’ tolerance for risk.

Our approach to developing hedging strategies starts first with clearly defining and quantifying the risk our clients face, whether through the purchasing of fuel to supply power plants and equipment or through the sale of power at wholesale or retail levels. Once risk is defined and quantified, we work with our clients to identify acceptable levels of risk given the clients’ strategic goals and financial targets. After the identification of acceptable levels of risk, we develop a means by which clients can manage risk, whether through contracting at certain volumes and pricing or the purchase of real or financial call or put options. Price and volume options within a hedging strategy come at a cost, whether it’s to cover a counterparty's risk, transaction costs or collateral requirements. L.E. Peabody & Associates, Inc. analyzes and prices financial options and real options with the use of closed-form option modeling and through the use of monte carlo simulation.
Commodity Risk vs Reward


Examples of Commodity Hedging Experience …
  • Coal supply contracts with volume and price flexibility
  • Financial power and natural gas put and call options
  • Physical power toll options
  • Delta-neutral trading strategies

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