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The lost art of hedging - Why hedging developed its poor reputation - EY - Global

The lost art of hedging?

Why hedging developed its
poor reputation

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“You should be hedging when prices are above their long term average because that is when there is more chance of prices going down, not up. Prices tend to rise steadily but they tend to drop sharply and quickly.”

Mike Elliott,
Global Mining and Metals sector leader

There are a number of reasons for the massive shift away from hedging, whether it be the failures that took place because of bad hedging strategies, or the fact that the accounting rules have been so complex and difficult to adhere to.

The new accounting requirements and additional disclosure prescribed by these standards may have actually increased the concern over hedging.

Indeed, under the current accounting standards much of commercial hedging activity was unable to qualify for hedge accounting. A further impact of the standards is that they have limited the ability of hedgers to restructure their hedge books in order to take advantage of changing market circumstances.

Hedging in itself is also inherently complex and made worse by underprepared company spokespeople, including chairmen, CEOs and sometimes CFOs trying to explain the complex accounting concepts that even the experts struggle with.

However there is real opportunity to be found in hedging – it can be extremely valuable if all the pros and cons are considered and a well thought out approach is taken.

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