Is there any way we can hedge against the energy and commodities as an individual investor?
Question/Comment: As an individual investor/consumer, it’s really hard to adjust to sudden increases in gas and food prices. Is there any way we can hedge against the energy and commodities as an individual investor?
Paul Solman: It might be a little late now, Satish, don’t you suppose? Ex ante – “before” – the run-up, you could have invested in oil or wheat futures and ridden the price rise.
But the way is still there, if you’ve got the will – and the money. Let’s say you’re afraid oil is going up to $150 a barrel by January. As of July 4, you could enter into a “futures contract” that would pay you the difference between $146.68 and whatever the price is at the end of December.
Unfortunately, if the price is below $146.68 at that point, you have to pay the difference to your so-called “counterparty.”
An alternative is to buy an option – a sort of insurance policy. The premium is the price of the option. To lay this out in further detail would risk leading you into temptation, however. But you could look it up.
As to food, you can buy oats, rice or soybean futures or, again, options on those futures.
A more modest approach, however, would be to head down to Costco, say, and load up on food at today’s prices to protect yourself against a price rise tomorrow. With any of this hedging, of course, your timing could be a touch off. Prices may now be at or near their peak. On the other hand, the futures market is betting that the price of most foodstuffs will go up in the next few years.