Good morning #EFT and #fintwit. Seen lots of discussion around hedging but very little detail. I'll do a few threads on why we hedge, the process we utilize, counterparties, documents and various structures. All will be through the lens of hedging a commodity business. Let's go!!
Why do we hedge? Insurance. In most commodity-based businesses, significant volatility exists in supply/demand rebalancing over time. This creates uncertainty in cash flow that can degrade the value of the business and create operational difficulties.