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My boyfriend owns and runs a nation wide trucking company that does long haul interstate loads. He always gets worried in how much diesel gas prices may eat into his costs. I suggested maybe he should look into futures to hedge against it. Surprisingly he's never knew he could do something like that even though he's a pretty active stock trader who both shorts and longs stock.

His company goes through 180,000 gallons of diesel in a year. My understanding is there is no specific diesel futures, only heating oil futures (which is essentially untaxed diesel). How well does /HO track diesel prices since they are chemically similar and made at the same time? I know there is a premium for diesel but is that premium pretty constant?

With each contract being 42,000 gallons then a year's hedge would be 4.25 contracts so either 4 or 5. The only other problem is he's paying for gas all across the nation. How much coverage would he have in hedging rising prices when the price he pays is really location specific? He's already doing price arbitrage like having planned routes to hit the lowest priced gas points along the way/etc to save as much money as possible, so IMO any rising of prices would be reflected across the board and he would benefit from hedging.

The only other concern is cash flows. He has about 100k operation capital. He's a bit nervous if he hedges for a year in advance and if he hedged at $1.65/gallon with it now being $1.5059/gallon his loss would have been 1.65-1.505 = $0.145 * 42,000 gallons = $6,090 a contract, and for 4 contracts $24k. I've explained to him if hes hedging over a year then instead of paying 180,000 gallons * 1.65, hes currently buying the gas $0.145 cheaper, so he's saving $26k, so position wise hes still break even in that example, I just painted a picture of it's like you're prepaying your company's gas use for a year so you'd have more predictable and even cash flows. Ultimately though it seems like there is an element of market timing. The lowest /HO has ever been was $0.84 and that could have been disastrous ($34k/contract loss) for his operating cash flow. Of course it would have been a huge boon if he longed it at the bottom, and since he is in the business he may have more awareness on what's going on with diesel than any of us.

What's your thoughts? Thanks!



Submitted April 29, 2017 at 02:50PM by IncendiaryGames http://ift.tt/2oJJt8t

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