Hindsight is 20/20

Institutional hedging programs seem to be discussed more intensely and at higher levels of negatively affected organizations only after some major price change has taken place.

Paradoxically, price levels that seem very rewarding in hindsight rarely seemed worth protecting before the adverse price move.

For example, a January 22 article in the Financial Times “Russia considers hedging part of oil its revenues” reports that

Russia is looking at hedging a portion of its oil revenues in the future, highlighting how the collapse in prices has upended Moscow’s economic plans.

The Russian finance ministry will this year prepare the technical infrastructure necessary to implement an oil hedging programme like that of Mexico, Maxim Oreshkin, deputy finance minister, said on Friday.

The Russians are now reacting to a sharp drop in the price of its major export, crude oil. The benchmark Brent crude oil fell from over $110/barrel in mid-2014 to less than $30 recently.

As the FT story indicates, some other producers such as Mexico have long established hedging programs involving put options.

Russia has limited choices

The University of Houston’s Craig Pirrong (a regular contributor to the JACF) comments on the FT story at his blog and outlines the limited choices available to the Russians at this very late date. Craig thinks that put options, rather than swaps, are the way for Russia to go but, even this choice is complicated by the cash Russia would need now to have to pay for the puts.

Read the whole thing.

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