Hedging 101
Keeping it Simple!
Do you remember those yellow and black paperback books that always had the phrase “for Dummies” in the title? This phrase usually came right after a specific task or activity. You can still find these books today in your local library or in bookstores. You can even go to the site, www.dummies.com, and get training in everything from technology, baking, investing, or sports.
The goal of these books could be expressed with the acronym – K.I.S.S. – which stands for, “Keep it simple, Stupid!” This doesn’t mean that the authors thought their readers were literally stupid. Instead, it means the authors wanted to provide training in a simplified manner that could be used and appreciated by complete novices as well as individuals with more experience.
Kicking off: Hedging 101
The Twin Feathers team has a similar goal as we kick off our “Hedging 101” blog series. We want to address many of the comments and questions about hedging we have received over our 25+ years in this industry. And we want to do this in a way that benefits those who are just starting out as well as those who are seasoned industry pros.
The most common comment from clients
What we hear most often from clients is this, “I just need some help with my hedging.” The statement is simple, but what does it mean?
1. Does it mean that the firm struggles to understand their risks?
2. Does it mean that they are unable to find the appropriate methods to minimize their risks?
3. Or does it mean that they want to know when to “buy low and sell high”?
Speaking the same language
Understanding that comment requires asking questions, some analysis, and most important, making sure that everyone is speaking the same language. That’s why our series will provide these two important elements:
1. Definitions of hedging terminology.
2. Explanation of how these terms can be used effectively in a fuel distribution business.
Defining Hedging
We want to begin with a definition that is vital for the remainder of our series. We want to define what hedge means.
Pull up the Merriam-Webster dictionary and the word “hedge” is described as a noun, a transitive verb, and even an adjective.
• As a noun, hedge means “a fence or boundary formed by a dense row of shrubs or low trees; a means of protection or defense.”
• While as a transitive verb, the definition is “to protect oneself from losing or failing by a counterbalancing action.”
•Finally, as an adjective the definition is “of, or relating to, or designed for a hedge.”
All three of these definitions have one main theme – that a hedge is a form of protection.
How hedging applies to a fuel distribution business
EVERY fuel distribution business has risks. Taking our shortened definition of “hedge” from above, we can imply that a fuel hedge is meant to protect a business against risk.
With this simplified view of fuel hedging, we can return to our three highlighted questions above and provide these answers. A fuel distributor needing help with hedging could mean they need assistance with understanding or minimizing their risks. However, knowing when to “buy low and sell high,” as the last question talks about, does not meet our definition of fuel hedging.
Setting the foundation
This first post of our “Hedging 101” series sets out some valuable concepts that form the foundation for our later posts. One of these concepts is that when we talk about hedging, we make sure we are all speaking the same language. To ensure this, we needed to define basic terms.
After examining various definitions of hedge, we determined a simple definition for our purposes is “a form of protection.” We then linked this definition to the fuel industry, by stating a fuel hedge is something that protects a fuel distributor against risk.
With these terms defined, we can move on to the next category in our series – “Identifying Risks.” Check our website over the coming weeks for the next posts in our “Hedging 101” series, as well as more expert information about the changing energy market.
Hedging 101
By JD Buss
