A manager can undertake a stack hedge using near term forward prices when the forward price curve is perceived as steep (longer term forward prices high) and subsequently flattens. In this way, the manager avoids locking in the longer term commodity price which has subsequently dropped. Am I reading this correctly ?
Well he can do it that way, stacked hedges are employed because shorter term contracts are more liquid (the bid/ask spreads and liquidity are much more reasonable). A big problem is making a rolling loss with these contracts if the PM didn’t know what he was doing. In this case, if there is an expectation of flattening of the curve, where the PM can lock in a more reasonable futures price, that is on the date of the anticipated expiry of the transaction or whatever, then he should do it.
whats a stack hedge ? read it can’t remember … back to the books
Stacked hedge is when you pile all of your hedging into short term contracts, for instance if you deliver 100 units over the next year, you buy 1200 contracts, short term and roll them over… so you hit the 1st month then roll over 1100, etc.
james, if you have contango you are screwed, isnt it?
If the forward curve becomes steeper (Contango), then yes you could suffer losses.