Case Studies on Successful Hedging with Commodities

Understanding hedging strategies is easier when we look at real-world examples. Successful hedging in commodities markets allows producers, consumers, and investors to protect themselves against price volatility, secure revenues, and stabilize costs. In this chapter, we examine practical examples across agricultural, energy, and metals markets in India and globally.

Case Study 1: Wheat Hedging by Indian Farmers

Scenario:

• Farmers in Punjab grow wheat, but the price is uncertain due to fluctuating demand and weather patterns. During a particularly bad monsoon season, there’s a risk that wheat prices could drop post-harvest.

Hedging Strategy:

• Farmers sell wheat futures contracts on the NCDEX to lock in a predetermined price before harvest.
  

• This ensures that even if market prices fall, they receive a fixed revenue.
  

Outcome:
By using futures contracts, farmers mitigated the risk of falling prices and secured stable income, allowing them to plan finances for the next crop cycle.

Case Study 2: Crude Oil Hedging by an Indian Refinery

Scenario:
An Indian refinery, such as Indian Oil Corporation (IOC), relies on imported crude oil. Sudden spikes in international crude prices can significantly impact operating costs.

Hedging Strategy:

• IOC enters into crude oil futures and swaps on the MCX to lock in purchase prices for the upcoming months.
  

• Additionally, options contracts provide flexibility to benefit if prices fall.
  

Outcome:
The refinery maintained predictable costs despite market volatility, stabilizing fuel prices for domestic consumers and protecting profit margins.

Case Study 3: Gold Hedging by a Jewellery Manufacturer

Scenario:
A jewellery company in Mumbai faces volatile gold prices due to global economic uncertainty and currency fluctuations.

Hedging Strategy:

• The company purchases gold futures contracts to lock in prices for their upcoming inventory.

• They also use options contracts to retain upside potential if gold prices rise.
  

Outcome:
The manufacturer safeguarded profit margins and minimized losses due to unexpected price increases while still benefiting from favourable market movements.

Case Study 4: Base Metals Hedging by Industrial Company

Scenario:
A steel manufacturer in India requires copper and aluminium for production. Price volatility in base metals could increase production costs.

Hedging Strategy:

• The company uses copper and aluminium futures on the MCX to lock in raw material prices.

• Spread trades are used to hedge against relative price changes between different metals.

Outcome:
The company stabilized input costs and maintained pricing competitiveness, even as global metal prices fluctuated.

Key Takeaways from These Cases

1. Futures Contracts Are Widely Used:
   Across commodities such as agricultural products, metals, and energy, futures are the most common hedging tool.

2. Options Provide Flexibility:
   Options allow hedgers to protect against adverse price movements while retaining the possibility of benefiting from favourable trends.

3. Swaps and Structured Products for Large Firms:
   Large corporates often use swaps and structured products for more sophisticated hedging, particularly in energy and metals.

4. Indian Exchanges Enable Hedging:
   Exchanges like MCX and NCDEX provide platforms for transparent and efficient hedging in India, with standardized contracts and regulatory oversight.

These real-world case studies demonstrate how effective hedging strategies can protect profits, stabilize costs, and provide financial certainty in volatile commodity markets. The use of futures, options, and swaps allows producers, consumers, and investors to manage risk efficiently. In the next chapter, we will explore Challenges in Commodities Derivatives Markets, examining the obstacles traders and investors face.