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Hedging transportation costs using options?

Posted on 2/12/15 at 8:46 am
Posted by misterc
Louisiana
Member since Sep 2014
700 posts
Posted on 2/12/15 at 8:46 am
I have a business where I sell a product that has a substantial freight cost to deliver. I sell most of my products for immediate delivery and can adapt to adjusting freight rates by factoring them into the price on the spot.

However in the last year I have secured some larger contracts where the entities require a guaranteed rate for nearly one year out.

Heres an example: I get PO to sell $1,500,000 of product last September for delivery July-September 2015. My product cost is 1,000,000 fixed leaving 500,000 profit less transportation. Cost to transport order when PO was authorized was 350,000. Now its around 280,000 leaving an extra 70,000 of potential profit if moved now.

What is the lowest cost way to protect this profit should oil rebound driving transportation costs back up? The transportation component is also affected by other factors such as capacity. So its not linear.

In the past I have negotiated locked rates with logistics companies to protect myself however I’m wondering if I could do this myself for less money using options. I can do the math if you provide some hints on which tickers\trades may be suitable. Thanks
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