You're welcome!

You are definitely correct that the margin requirements reduce the effectiveness of the hedge. For firms that have easy access to forward contracts with reasonable fees, those can be more effective as the forward doesn't have the same issues of intermediate cash flow swings (both in the initial margin and the mark-to-market adjustments).

a good question, can someone prepare an answer ?

I think the answer would be that we cannot predict the market and the current figures show backwardization which puts us in a better position to hedge on that contract which is lower is price and to avoid price volatility plus cash flows can be determined. Im thinking if the current spot rate is high and the future rate is low, that gives us a better position to secure our financial position.

U r right Rakshith. The IM is like a deposit. You will receive it at the end of the contract. But you have to consider the interest forgone on the IM to arrive at Complete profitability of the contract or for any other decision making purpose.

because the 90000 is what actually used in each month, 84000 is for the 2 future contracts. Fuel saving does not matter by future contract but by the actual price of gas and amount used by the company.

its just an example. he could have used 84000 but that doesn't add the spice in the question.

yes it can be done at any time, you will offset the position on the same contract, on the same exchange. So if you buy 1 rb dec 18 expiration, then you would sell 1 rb dec 18 exp to close.

The futures price is to take delivery of the underlying asset at a price locked in today. This can be used for either speculation or hedging.

⁠@@kevinbracker thanks, for the example in the video, I noted that the futures price at expiry is not equal to the spot of fuel (futures price aug is $2.89, spot of fuel is $3.25). Why would that be so…? since futures at expiry would normally be priced at the spot

@@WeiHanCheng You have two "moving" prices (futures prices will adjust to spot prices as the futures gets closer to expiration), so that at the moment of expiration they should be "almost" equal (there might be slight discrepancies based on costs of liquidating the hedge). However, we don't see the prices of each at expiration in this example. More importantly, you are comparing retail prices at the pump to wholesale prices for the actual gasoline which will account for differences due to taxes, profits, etc.

Margin requirements has a lot to do with the volatility of the asset. The exchange is always exposed to 1 days worth of price movement on any position. So the bigger those 1 day movements can be, the more margin they will require on that contract.

+Víctor Cortés Yes, plus maintenence margin and if there is more volitility the exchange can increase margins to reflect the increased risk.

Each Front Month expires, so you get to re-use that margin. So there is no use for that 3X Margin as you say, unless you are dong 3 months simultaneously, which you don't say is done, and your example shows that you are rolling over the contracts anyway, to hedge current monthly prices for 3 months.

The calculation shown at question 6 shows that in fact he did buy in total 6 contracts at the start of the hedge: 2 for each month which he wanted to hedge. At the moment of buying these 6 contracts is it necessary to provide the initial margin for each contract. And he seems to hold on to these contracts until their expiry date. So in this case is it not possible to re-use the margin, as the position is not being rolled forward.

+Jack Linton This video was made a few years ago and I probably just made up the initial/maintenance margins. However, currently, initial margin (performance bond) is set at 110% of the maintenance margin (performance bond) level. So, if maintenance was set at $8500, the initial would be $9350.

Hеre аrе just а fеw of thеееe keуyуy sеcrets inside mу INCRЕDIBLЕ traaaаding sоftwarе.==>twitter.com/d98aca65bff1e44c1/status/804699524132278272 Futurеs Hеdging Ехample

Hedge Formula has just hit the markets and it’s starting to make quite of a noise in the trading community.Details our post>> www.cotraks.com/SH2O Many have asked us if this is any better or worse than the previous version, or simply another gimmick to make traders spend more money. Let’s clear the obvious first, Hedge Formula is in no way a scam and we can assure you that this company is only here to help your trading career.*

In terms of short term interest rate futures - if we expect interest rates to rise in the future, we open our position today by selling the future TODAY, and close our position in the future by buying (to reverse the pre-existing sell position). What you need to understand is the inverse relationship that an interest rate future has with its underlying interest (a relationship to the effect of 100 minus x%) - so, as interest rates increase, the future thereof becomes cheaper. To relate this to your scenario, an increase in rates in the future will enable you to purchase cheaper futures in the futures, that you have already "sold" and the higher price before - if that makes sense :-)

bonds and interest rates are inversely correlated so if rates go up, bonds and stocks tend to go down. So selling short term bond futures protects against a rise in interest rates.

+Nurul Kamilah Since expectation is for cable to appreciate against dollar. You will want to hedge in the direction of the risk, which is to buy GBP contract now, if gbp does appreciate, your cash market value will decrease, however your GBP futures will increase as well. There will be a net zero effect from unwinding your futures position in 3 months time, assuming perfect hedge. Each contract size for gbpusd is 62,500. 925000/62500 = 14.8. You will need 15 contracts, although you will overhedge by a smidgen.

how can you incorporate the expectation of cable appreciating against the dollar into a bonafide hedge? to protect the downside risk of a decline in the value of sterling, one would sell -15 6B 3 months out which would offset the losses incurred if the 6B declined. please advise if I misunderstood, thanks.

If he had not made the hedge, he would have saved (made a profit savings of) $130k. The hedge made a loss of $113k which means he still made $17k (profit savings [$130k - $113k]) due to the drop in gasoline prices. For it to have been a bad hedge, the gasoline prices at the pump would have had to drop significantly lower compared to the Futures prices so that he lost more than $130k.

thanks for the timely feedback, saving lives

No need for sarcasm... how about that for timely feedback!