Hedge operations: what are accumulator products?

In hedging operations, there are accumulators. Considered structures, they are an alternative for protecting businesses from volatility, an intrinsic characteristic of the commodities market.

In general, accumulators comprise a set of options. Every option inherently has a premium, higher or lower, which varies according to its risk. However, it allows for the creation of more sophisticated products.

Thus, through this financial instrument, traders seek to benefit from possible opportunities and manage their risks.

Do you want to understand how accumulators apply to hedge operations? Read our exclusive content!

Accumulators: understand the concept

Accumulators are products in which one of the parties periodically buys or sells a certain number of futures contracts on the commodity in question.

The prices are pre-determined for a series of pre-defined dates over a specified period. What will define the behavior of the accumulator on each predetermined date is the closing price of the commodity, compared to the predetermined prices at the accumulator levels.

The value of the contract can thus increase periodically and intensify leverage if a predefined condition is triggered. For example, if the price of the commodity goes above or below a certain level agreed between the parties.

In this way, these products allow a client to “accumulate” a future sold above the current market or a future bought below the current market. However, the market must remain within the specified range.

How do accumulation products work in hedge operations?

To help you understand how an accumulator works in hedging operations, let’s look at two common situations in which it is used in the sugar market. Below, we specify each of them.

●      Sales accumulator with knock-out

Imagine the case of a mill owner who has 100,000 tons of sugar. He wants to trade this quantity in the short term and hedge against price fluctuations.

By analyzing the main market intelligence reports for this commodity, he realizes that there is a prospect of low prices and high volatility. He sets a reasonable value of 19c/lbs (quoted in cents per pound) to sell the product.

To achieve greater profitability and cover production costs, he opts for a structured hedge operation. His aim is to guarantee the sale of as much as possible at the target price.

He can ensure that he sells at a price above that of the market, using a product structured as a hedge. However, they have to make two trade-offs:

• Sell double the volume if the market rises above the target price.
• Include knock-out barriers that close the trade if the market reaches a bearish level.

Consider that each contract traded on the NY exchange is equivalent to 50 tons. The producer then spreads the sale over 20 working days, trading an average of 100 to 200 contracts a day. In other words: 5,000 to 10,000 tons per day. A strategy using accumulators could look like the one shown below:

The miller is thus able to improve his selling price by taking the risk on the quantity to be accumulated (he may suffer a double or knock-out).

●      Purchase accumulator

Now think that you are a buyer of sugar in a chocolate industry. There was an increase in demand at Easter and you need to produce more. In other words: you need more sugar in the short term.

When you analyze the latest market intelligence reports, you realize that there is a prospect of high volatility in this commodity. So you define two values that will guide your purchase:

• 00 c/lbs as the maximum price you can pay to maintain profitability.
• 50 c/lbs as the ideal price you want to pay to obtain lower operating costs.

With that defined, he resorts to using a structured operation. Your goal is to secure the stipulated price ceiling and buy as much sugar as possible at 16.50 c/lbs. So, a possible accumulator would be:

In this strategy with a ceiling, the buyer gives up a larger market range. In the meantime, they can guarantee a minimum quantity with a price at least at the ceiling.

How important are accumulation products in hedge operations?

Accumulator products are essential in hedging operations, as they provide producers, companies and investors with mechanisms to mitigate risks due to price fluctuations.

By using these products, you can fix and “accumulate” a specific price for a given quantity of commodities, even if delivery takes place at a future date. This makes all the difference for sectors that rely heavily on commodities, offering them a way to hedge their operations.

In addition, accumulator products can provide greater financial stability. After all, they allow traders to plan their production costs and set their purchase and sale prices with greater confidence, for example. In this way, market participants become more competitive.

Hedgepoint: accumulator products for the commodities market

Understanding the application of accumulation products helps to improve risk management in commodities. In this way, market participants can make better-informed decisions.

Hedgepoint offers sophisticated hedging instruments. Operating globally, our market intelligence team develops up-to-date reports on the movements that can cause volatility. In addition, we make materials available on Hedgepoint HUB, our exclusive educational platform.

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