{"id":7205,"date":"2025-05-26T08:05:11","date_gmt":"2025-05-26T08:05:11","guid":{"rendered":"https:\/\/www.alcircle.com\/blog\/?p=7205"},"modified":"2025-05-26T08:05:13","modified_gmt":"2025-05-26T08:05:13","slug":"hedging-with-jorge-episode-55-understanding-hedging-why-and-how-it-works","status":"publish","type":"post","link":"https:\/\/www.alcircle.com\/blog\/hedging-with-jorge-episode-55-understanding-hedging-why-and-how-it-works","title":{"rendered":"Hedging with Jorge #Episode 55: Understanding hedging, why and how it works"},"content":{"rendered":"\n<p>Let\u2019s break down the <a href=\"https:\/\/www.alcircle.com\/blog\/hedging-with-jorge-episode-54-understanding-hedging-through-everyday-life-examples\/\">concept of hedging<\/a>, especially in the context of aluminium trading, in a clear and simple way.<\/p>\n\n\n\n<p><strong>Stepping into the shoes of a hedger:<\/strong><\/p>\n\n\n\n<p>Imagine you&#8217;re someone who uses aluminium in your business. Naturally, you\u2019d buy aluminium from your regular supplier. But what if your supplier can\u2019t give you a fixed price today for something you&#8217;ll need in July? That\u2019s where hedging comes in.<\/p>\n\n\n\n<figure class=\"wp-block-embed is-type-video is-provider-youtube wp-block-embed-youtube wp-embed-aspect-16-9 wp-has-aspect-ratio\"><div class=\"wp-block-embed__wrapper\">\n<div class=\"youtube-embed\" data-video_id=\"VXd0e5PObGo\"><iframe loading=\"lazy\" title=\"Hedging with Jorge #Episode 55: Understanding hedging, why and how it works\" width=\"696\" height=\"392\" src=\"https:\/\/www.youtube.com\/embed\/VXd0e5PObGo?feature=oembed&#038;enablejsapi=1\" frameborder=\"0\" allow=\"accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture; web-share\" referrerpolicy=\"strict-origin-when-cross-origin\" allowfullscreen><\/iframe><\/div>\n<\/div><\/figure>\n\n\n\n<p><\/p>\n\n\n\n<p>You know how a futures market works \u2013 you can either buy (go long) or sell (go short) aluminium for a future date. The big question is: why would someone buy aluminium on the futures market instead of from their usual supplier?<\/p>\n\n\n\n<p><strong>When your supplier can\u2019t fix the price:<\/strong><\/p>\n\n\n\n<p>Often, your supplier isn\u2019t trying to be difficult \u2013 they simply can\u2019t fix a price right now. They can only offer a price that will be based on a future market value, plus a premium (an extra cost added on top).<\/p>\n\n\n\n<p>Let\u2019s say today is May. You\u2019ve already sold your aluminium-based product to a customer at a fixed price for delivery in July. But your supplier tells you they can only give you the aluminium at a floating price that will be determined on the third Wednesday of July.<\/p>\n\n\n\n<p><strong>Now you have a problem:<\/strong><\/p>\n\n\n\n<p>You are selling your product at a fixed price.<\/p>\n\n\n\n<p>You are buying your raw material (aluminium) at a floating price.<\/p>\n\n\n\n<p>This mismatch creates risk. If aluminium prices rise by July, your costs go up \u2014 but your selling price stays the same. That\u2019s a potential loss.<\/p>\n\n\n\n<p><strong>How the futures market helps:<\/strong><\/p>\n\n\n\n<p>This is where the London Metal Exchange (LME) steps in through a broker. It says:<br>\u201cHey, I can help. You can buy aluminium from me today, for delivery on the third Wednesday of July \u2014 just like your supplier\u2019s floating price.\u201d<\/p>\n\n\n\n<p>You might wonder, \u201cSo now I\u2019m buying aluminium twice?\u201d<br>Well, kind of \u2014 but only one is physical. The LME lets you buy financially \u2014 it\u2019s called cash settlement.<\/p>\n\n\n\n<p>When July arrives, you don\u2019t actually collect any metal from the LME. Instead, you simply sell the futures contract back. The difference in price between what you bought it for and what it\u2019s worth in July covers any increase in your physical aluminium cost.<\/p>\n\n\n\n<p><strong>What\u2019s the point?<\/strong><\/p>\n\n\n\n<p>You\u2019re using the futures market to lock in a price and protect yourself from price increases. If the price goes up in July, your LME futures contract pays you the difference \u2014 and that covers the extra cost from your supplier. This is the essence of hedging.<\/p>\n\n\n\n<p>It may sound tricky at first, but once you get the hang of it, it\u2019s like riding a bike \u2014 it just clicks.<\/p>\n\n\n\n<p><strong>Final note<\/strong><\/p>\n\n\n\n<p>This explanation gives you the logic behind hedging. In the next session, we\u2019ll look at some numerical examples to see how it works in real life. If you want to get a head start, try doing the math yourself using this scenario \u2014 it\u2019s a great way to understand how hedging can protect your business.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Let\u2019s break down the concept of hedging, especially in the context of aluminium trading, in a clear and simple way. Stepping into the shoes of a hedger: Imagine you&#8217;re someone who uses aluminium in your business. Naturally, you\u2019d buy aluminium from your regular supplier. But what if your supplier can\u2019t give you a fixed price [&hellip;]<\/p>\n","protected":false},"author":89,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[5],"tags":[],"class_list":{"0":"post-7205","1":"post","2":"type-post","3":"status-publish","4":"format-standard","6":"category-open-forum-for-aluminum-community-blog"},"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.3 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Understanding hedging, why and how it works<\/title>\n<meta name=\"description\" content=\"Imagine you&#039;re someone who uses aluminium in your business. Naturally, you\u2019d buy aluminium from your regular supplier\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.alcircle.com\/blog\/hedging-with-jorge-episode-55-understanding-hedging-why-and-how-it-works\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Understanding hedging, why and how it works\" \/>\n<meta property=\"og:description\" content=\"Imagine you&#039;re someone who uses aluminium in your business. Naturally, you\u2019d buy aluminium from your regular supplier\" \/>\n<meta property=\"og:url\" content=\"https:\/\/www.alcircle.com\/blog\/hedging-with-jorge-episode-55-understanding-hedging-why-and-how-it-works\" \/>\n<meta property=\"og:site_name\" content=\"AL Circle Blog\" \/>\n<meta property=\"article:publisher\" content=\"https:\/\/www.facebook.com\/AlCircle\" \/>\n<meta property=\"article:published_time\" content=\"2025-05-26T08:05:11+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2025-05-26T08:05:13+00:00\" \/>\n<meta name=\"author\" content=\"Jorge Eduardo Dyszel\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:creator\" content=\"@alcircle\" \/>\n<meta name=\"twitter:site\" content=\"@alcircle\" \/>\n<meta name=\"twitter:label1\" content=\"Written by\" \/>\n\t<meta name=\"twitter:data1\" content=\"Jorge Eduardo Dyszel\" \/>\n\t<meta name=\"twitter:label2\" content=\"Est. reading time\" \/>\n\t<meta name=\"twitter:data2\" content=\"3 minutes\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\\\/\\\/schema.org\",\"@graph\":[{\"@type\":\"Article\",\"@id\":\"https:\\\/\\\/www.alcircle.com\\\/blog\\\/hedging-with-jorge-episode-55-understanding-hedging-why-and-how-it-works#article\",\"isPartOf\":{\"@id\":\"https:\\\/\\\/www.alcircle.com\\\/blog\\\/hedging-with-jorge-episode-55-understanding-hedging-why-and-how-it-works\"},\"author\":{\"name\":\"Jorge Eduardo Dyszel\",\"@id\":\"https:\\\/\\\/www.alcircle.com\\\/blog\\\/#\\\/schema\\\/person\\\/64371a8562aa8589375f4f9a8c08a9f6\"},\"headline\":\"Hedging with Jorge #Episode 55: Understanding hedging, why and how it works\",\"datePublished\":\"2025-05-26T08:05:11+00:00\",\"dateModified\":\"2025-05-26T08:05:13+00:00\",\"mainEntityOfPage\":{\"@id\":\"https:\\\/\\\/www.alcircle.com\\\/blog\\\/hedging-with-jorge-episode-55-understanding-hedging-why-and-how-it-works\"},\"wordCount\":538,\"commentCount\":0,\"publisher\":{\"@id\":\"https:\\\/\\\/www.alcircle.com\\\/blog\\\/#organization\"},\"articleSection\":[\"AL Circle\"],\"inLanguage\":\"en-US\",\"potentialAction\":[{\"@type\":\"CommentAction\",\"name\":\"Comment\",\"target\":[\"https:\\\/\\\/www.alcircle.com\\\/blog\\\/hedging-with-jorge-episode-55-understanding-hedging-why-and-how-it-works#respond\"]}]},{\"@type\":\"WebPage\",\"@id\":\"https:\\\/\\\/www.alcircle.com\\\/blog\\\/hedging-with-jorge-episode-55-understanding-hedging-why-and-how-it-works\",\"url\":\"https:\\\/\\\/www.alcircle.com\\\/blog\\\/hedging-with-jorge-episode-55-understanding-hedging-why-and-how-it-works\",\"name\":\"Understanding hedging, why and how it works\",\"isPartOf\":{\"@id\":\"https:\\\/\\\/www.alcircle.com\\\/blog\\\/#website\"},\"datePublished\":\"2025-05-26T08:05:11+00:00\",\"dateModified\":\"2025-05-26T08:05:13+00:00\",\"description\":\"Imagine you're someone who uses aluminium in your business. 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