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Berkeley Futures

Berkeley Hedging Services

Berkeley Futures offers hedging services in a wide variety of products including grains, softs, currencies, stock indices, interest rates, precious and base metals.

Below are examples of how some clients may use our services in order to hedge exposure in various products.

Hedging a physical trade in Copper

A client has agreed to take delivery of copper, from a producer, at some future date. He has based his decision on the current cash price, but needs to guard against adverse movement in the meantime. The client could, therefore, buy an LME contract for the future date, and sell when the 'hedge' is no longer required. Or, the client could buy a call option, again selling when the hedge is no longer required.

Example using futures:

Cash Copper is $7400 per tonne and the client wishes to take delivery in 3 months.

The 3 month copper price is $7420 and the client buys 1 contract of 25 tons.

If in 3 months, the cash price rises to $7600, the client takes delivery and squares the hedge position. The cash price has risen by $200 per tonne, but the offsetting hedge has saved $180 (7600 - 7420). Had the price fallen, the loss on the hedge would have been offset by the cheaper physical cash price paid.

Example using options:

Cash Copper is $7400 and the 3 month $7500 call option is priced at $145. If the client needs to hedge against a dramatic surge in price, then the client may consider buying the call. In this example, the breakeven level on the hedge would be $7645 (7500+145). If Copper rallies to $8000 at expiry, then the client has lost $600 per tonne on the physical side, but partially mitigated this loss with a $355 per tonne profit on the call option. If the Copper price settles below the level of the call, then the option will have expired worthless. The net costs would be calculated by adding the prevailing physical price plus the cost of the options. An option works much like an insurance policy with the maximum downside being the cost of the premium (price) of the option.

Hedging a Currency exchange rate

A client requires Euros in 3 months time when buying an overseas property. The client is concerned that Euro may become more expensive in terms of Sterling in the meantime.

In order to take advantage of the current rate, the client buys Euros 500K at 0.83 against Sterling for 3 month forward. At expiry, when the property payment is due, the client sells the Euros at the prevailing market - 0.84, and although Euro has appreciated, the client has successfully hedged the exposure. Had the exchange rate dropped below 0.83 in the interim, the client's hedge would have lost, but the initial rate would have been guaranteed.

Above are a few basic examples of how some of our clients utilise our services in order to hedge their exposure to price movement. For further information on how Berkeley can provide you with a specific hedging package please contact our trading desk on +44 (0) 207 758 4777 or email trade@bfl.co.uk.