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Hedging Strategies, Case Study Example

Pages: 1

Words: 329

Case Study

When it comes to hedging, there are particular elements of business operations that need to be given attention to. One of which is the capacity of the organization to set aside a particular investment to be their holding security. Any amount that they put aside would serve as the balancing factor that would cushion the assets of the business especially when it comes to determining the capacity of the organization to face the different fluctuations in pricing and other financial factors that have a distinct impact on the overall operation of the organization.

For Thomas Foods, it is quite important to give attention to how the organization works especially in correlation to their suppliers, the farmers and growers. For the business’ case, it might be more effective to put the spread hedging approach into work. Farmers and growers, given the nature of their work usually undergo a distinct process of changing prices depending on the different elements they use for growing their produce. Naturally, such condition would affect the fluctuating nature of the pricing that they use as they distribute their products in the market. These small, but frequent fluctuations could largely affect the overall performance of the organization in the market. The spread hedging approach serves as a cushion for business assets during such situations. One specific consideration under this type of hedging is the bear put spread operation.

When an investor takes the chance on utilizing the bear put spread, it is often evident how the investor puts a higher strike price then sells another one at a much lower price within the same date of expiration. This protection serves only a bit of payout for the investor, but the cushion it provides to protect the investment on a mild-to-moderate downturn of prices pay a lot especially in the long run. The savings that the investor gets from such approach accumulates through time hence making it easier for the business to adjust to pricing changes that their suppliers imply.

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