Since February 24, the world has had its eyes on the war between Russia and Ukraine, clearly a very unfortunate situation from many points of view, but especially considering the number of innocent people who have died as a consequence of it.

Economically, one of its consequences is the high volatility of the markets, where commodity prices have soared to values not reached for a long time. There have even been situations totally out of the ordinary (nickel tripled its price in one day as a consequence of the so-called «short squeeze», although this price was later «erased» by the LME). This means that many positions that speculated on the fall of the price were untimely closed because they did not cover the necessary margins of guarantee.

The futures and options markets are mostly used by speculators but also by many companies to hedge their exposure to the price of a certain asset (commodities, interest rates, currencies, etc.). How does this work?

If a company needs a certain commodity as an input for its production, for example aluminum, it can turn to the London Metal Exchange (LME) and buy it in the future. To implement this strategy (regardless of the bureaucratic process of opening an account, etc.) it must deposit a margin, which allows the market to ensure the fulfillment of the commitment.

The margins are approximately 15% of the traded value, although depending on the volatility of the market, they undergo modifications. For this reason, when a company embarks on a price hedging strategy, emphasis is always placed on the need to have sufficient resources to cover the required margins. Otherwise, it could suffer not only the closing of its hedging positions with the consequent loss, but also be exposed again to the price swings that initially motivated such hedging.

The current context, which is clearly far from periods of stability and tranquility, leads us to meditate on the benefits of maintaining a price hedging policy, and at the same time, to consider all the variables involved. A poorly implemented strategy can be much more damaging to an organization than no coverage at all.