An offset hedge is designed to remove the basis of price risk of the physical operation by offsetting it with an equal and opposite sale or purchase of the futures contract on the futures exchange. Any risk of price volatility that arises from the physical transaction is thereby eliminated. An offset hedge is a financial operation in which the hedger (IRT) maintains a ‘balanced book’ with each physical transaction being offset by an LME transaction. In this example both the buyer and the seller choose to hedge their price risk.
This hedging service allows you to take advantage of market opportunities and lock in your prices and profit.
1. The supplier agrees to sell a specific quantity of physical material to the consumer (IRT) for a delivery date in the very near future by signing a purchase order supplied by IRT. In that purchase order is an agreed price for the material based off of the current LME precious metal market.
2. Once IRT has that P.O., it mathematically calculates the amount of precious metals contained in the quantity of material and sells those ounces of precious metal into the market using a futures contract.
3. Once IRT has settled the transaction and paid the supplier, it processes samples and ships the material to the smelter. In 150 days the smelter picks a date to settle the transaction with IRT, on that same date IRT simultaneously buys the metal sold into the futures market back at the same time it sells it to the smelter. Profits from one transaction offset losses from the other, and vice versa, creating a risk free transaction for IRT and its supplier.