Hedging 101… A good example of the flow risk to hedging… A forward or futures hedge creates a potential cash flow mismatch… For producers, a rise in price moves against the hedge (which could be a year or more out) and more margin money is required to maintain the position… The benefit of higher priced product sales in the current month is not against enough volume to offset margin calls.. It’s why many oil producers buy puts which set a worst case selling price but allow participation in upside price movement (the most you can lose on the hedge is the premium paid out)…. Google Metallgesellschaft and Mexico’s oil hedge for two approaches to hedging…. Farmers face an addition risk to cash flow risk… In a drought year, prices move sharply higher, more margin money is required and if yields are down, the farmer may not have enough product to offset the forward sales….
Here are Joe Wallace and Georgi Kantchev,WSJ, on German utilities’ margin calls:
“The companies need extra cash to keep up with soaring natural-gas and power prices. When markets jumped in recent months, so did margin payments tied to contracts that energy companies had taken out as hedges for sales of gas and electricity.”…
”Some of Uniper’s hedges are deep in the red. The Düsseldorf-based utility said in November it had sold 90% of its German power for 2022 forward at €49 a megawatt-hour. On Wednesday, German power futures for February traded at €273 a megawatt-hour.”