When addressing the following issues, ask yourself questions in the following areas:
Clarify your risks:
- What prices am I exposed to?
- When am I going to be exposed to price changes?
- For how long will I be exposed?
- Am I a buyer or seller of the price risks?
- What do I pay attention to that affects these prices?
Assess your need for protection:
- Have my revenues or expenses been negatively affected in the past by an
adverse price change?
- Is my business disproportionately exposed to prices in some specific market?
- Do the normal price fluctuations make my business vulnerable?
- Have I endured “lean” seasons because of drastically lower revenues or
higher expenses?
Quantify your price risks:
- How much exposure am I at risk for?
- What level of price change will drastically affect my bottom line?
- Evaluate how much risk you want to protect against.
- How much cash can you reasonably afford to use to fund risk management?
- What is the price of insurance?
- Don’t spend $1,000 to protect $1,000.
Balance uncertainty with opportunity cost:
- Do you want to set a price or insure against a catastrophic move?
- Do you like the current price?
- Do you think prices may improve?
These initial steps will help you decide whether to protect yourself. Your thoughts and input
will help us show you which products, or combination of products, offer you the best protection. Each case is different. Fortunately, futures and options contracts provide the flexibility for you to develop a price protection strategy that may effectively complement your overall business plan.
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