I am a part of the team which is responsible for management and hedging of commodities exposures. Some say corporates are good only in following advice from banks or brokerages. I do agree corporates do not have market insight of a bank. But here is a problem. It is not bank or broker or a hedge fund that has biggest risk that markets will go against them. These guys always have an option to do nothing and wait for a better trading opportunity where as we don't. We have to continue to purchase commodities, spend currencies for daily business. Such company is always exposed to changes to market price even if it decides not to hedge. In fact my company has probably one of the biggest short commodities portfolio in the world. Managing such risk effectively is a challenge. It is like being between a rock and a hard place. You get your behind kicked all the time be senior management, whether it was a missed opportunity to hedge or hedge that turned to be out of the money. Critics will say if you lost money on your hedge then you probably bought it cheaper on physical market. let's face it, nobody wants to loose money, full-stop.

So I do not have an option to do nothing as I am always in the position (short in this case). I think people like me have higher motivation to earn positive return on their portfolio then other players. In fact my intention is to bring hedging to a performance benchmark of proprietary trading.

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Monday, July 19, 2010

Something's gotta give PART2

Last week in the publication "Something's gotta give" I speculated on possible reversal in EURUSD. While technically head-and-shoulders in EURUSD targets roughly at least 1.3150 (see the chart below), but lack of deflation talk and bearish momentum/technical formations in other assets classes makes me think EUR to top ahead of minimum target and ideally around 100d moving average.

Intra-day developments with this currency pair  show signs of trend exhaustion as it failed to breach 1.30 again. The question is would you wait for head and shoulders target to be reached or take your profits now after such a rally? This rally in itself was short covering rather then something big. If I was long EUR, I personally would be frustrated to see profits evaporate. Therefore I think we might in for a top for the time being and relationship among risk assets is to resume again. And as posted last week there are more risks to the downside.

There is obviously risk we close above 1.30, but risk/reward for short EUR trade looks interesting...
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