Automation in the Hedge-Ratio Estimation Cottage Industry

Futures markets can be used to minimize a firm’s financial exposure to cash price fluctuations, but it’s costly to determine the futures position size that minimizes this risk. We present survey results that indicate that finding the risk-minimizing futures position requires 160 hours of skilled market analysts’ time spread over 60 days and costs between $15,000 and $25,000. This process can be automated so that optimal futures positions can be determined in minutes at a fraction of this cost. We introduce HedgeSmart, software that determines the optimal hedging strategy by combining user-supplied, business-specific data with the generally accepted price-risk minimization model and an up-to-date database containing more than 10 million records on commodity price movements. The user can incorporate his/her own historical commodity prices to insure that the analysis reflects specific location, grade, and pricing characteristics as appropriate to your firm. The time and cost savings that HedgeSmart achieves enables analysts to ask “what-if” questions, to explore alternative hedging approaches.