Let
us imagine an exporter who expects to ship 1,000 MT of cocoa beans in
May (it is now January). To hedge his price risk, he sells 100 futures
contracts.
In March, he realizes that his shipment will delayed to late June.
However, the maturity of his contract is only until the third week of
May. To avoid loosing his hedge, he decides.
- to buy 100 May cocoa contracts
- to sell 100 July cocoa contracts
He has thus rolled forward his hedge from May to July.
This process is called
roll-over
There can be several reasons to roll over contracts. In particular ;
As in the example before, one may need to cover a delay in shipment
(or in production, reception of goods, etc ..)
One may wish to take a longer-term hedge than otherwise feasible
One may wish to get a cheaper longer-term hedge than is possible by
directly buying, or selling, far-forward futures contracts
One may be exposed to a time difference between the purchase and the
sale of commodities. This is to some extent the case for traders, but
is especially relevant for processors of commodities
Rolling over contracts is a normal part of hedging activity
However, from a managerial point of view, it should be understood that
rolling over adds another layer of complexity if accountancy and
control systems are not appropriate, rolling over can used by an
unscrupulous trader to hide trading losses from the company?anagement.
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