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Futures as securing for companies make sense for enterprises which trade internationally and with several currencies. Here you can secure your own currency, e.g. the Euro against another currency with reasonable effort and at relatively low costs. This way of securing is a bit like deep-freezing a certain currency exchange rate. Our Support Team is happy to provide general information (no investment tips or recommendations).Another opportunity, however restricted to only a few raw materials, is securing of physical raw material. Let’s assume a company buys raw material in order to process it and sell it to its customers afterwards. This involves a chance you might suffer loss due to market developments to the disadvantage of this physical raw material position. In order for the company to actively oppose this loss, they can acquire this raw material as short sale in the same extent as a physical position, and consequently the likelihood of loss is cancelled out.Here we have equalization between profit and loss. The company merely incurs costs for the transaction of futures.Pros & Cons of futures securing:One advantage is that a company receives a fixed price and accordingly a product becomes more calculable.It is disadvantageous that you do not have any additional profit opportunities which might arise due to a general increase in prices relating to physical raw material.In a perfect securing scenario, the profit generated by securing exactly equalizes the loss of the basic position. Most securing scenarios, however, are not perfect since the selected derivatives and positions at trading places show slight differences in rate movements, or the number of derivatives bought is not identical to the number of open positions.Here is a practical example:Let’s assume a gold trader receives a delivery of 5kg gold of a total value of 170,000 Euros, and he wishes to maintain both the current value and limit a possible loss to a minimum in case of dropping rates. In such case, he has the opportunity to open a gold future short position of a value of 170,000 Euros.Consequently, the value of 5 kg of gold is technically deep-frozen except for order fees.
Hedging with futures
Example in numbers
Profit or loss on exchange rates if the underlying rises or falls.
+ 1 %
+ 5 %
- 1 %
- 5 %
- 10 %
Note: In this example, fees for acquisition of a gold future position have not been taken into account. Costs are usually relatively low compared with securing costs.