Price Offset Hedge

A price offset hedge is known as a “cash flow hedge” by accountants and it offsets the price risk consequence of making a
fixed priced purchase or sale of physical material. In contrast to the previous hedge, an offset hedge is undertaken when the company buys or sells physical material,rather than some time ahead of an expected physical transaction.

A company may use an offset hedge when it is accumulating plastic inventory that has a certain price, selling futures to hedge the risk of price declines and later buying back the futures when the inventory levels decline.

Another converter may find its customer wants a firm price for purchases only when market prices are low. The converter could then buy futures to cover those low priced product sales and then sell back the futures hedge in pieces to achieve an average price over the whole budget period.

The intense price volatility that the industry has suffered post the new economic order in recent years is starting to become unmanageable for many parts of the supply chain.

Producers attempting to pass on rising prices are meeting resistance as the converters themselves are typically under pressure from consumers to maintain previously agreed prices. This means that converters are increasingly ‘squeezed’ in the middle, and supply chains, rather than the suppliers, are competing.

Whilst the plastics industry supply chain grapples with these issues, the emergence of new world economies, such as China, India and their demand for industrial raw materials is fundamentally changing the global balance of supply and demand. With these new market conditions, and with no indication of when they will end, the global plastics industry desperately needs a long-term solution to the problem of price volatility.

Now here is where I stick my neck out !

I believe the Duponts and the Dows and the monsantos which seize the initiative and form a global electronic market place that trades on carefully designed plastics futures and options contracts would be the New leaders in the plastics market place, or rather survivors ?

Author S Venkataraghavan is currently with ACE Clean Energy Ventures, New Delhi as an Entrepreneur in Residence. Venkataraghavan finished his B.Tech in Chemical and Electrochemical Engineering from the Central Electro Chemical Research Institute, Karaikudi, and has been with the Altos Group of companies since 1996. The views expressed here are his personal and need not be the views expressed by his employers.