JLN interviewed Contango CEO Clive Furness at FIA EXPO 2022 about the innovative new way to hedge commodities that he recently released in a white paper, to which he gave the moniker “The Contango Hedge.”
The new way to hedge cash and futures together is not in use yet, but there is a lot of interest, Furness said. Major commodity merchants have engaged with Furness to see if the Contango Hedge will help them deal with the pain points they have in their commodity hedging, he said.
Finance banks have pulled back from commodity hedging, Furness said. The volatility of the derivatives side of a hedge, and the lack of cash flows on the cash commodity side of the trade, put huge strains on the availability of commodity financing, Furness said.
The Contango Hedge can work without a futures market, but you need an index to tie the trade to, he said. Using derivatives makes it easier, though, he said.
He said he expects the energy markets will be the first to take advantage of the Contango Hedge. He said any market with 10% moves on the day would be a good one to use.
Furness also addressed risk management aspects of the Contango Hedge.
Furness said there will be a small licensing fee and transaction fee for use of the Contango Hedge, but the savings on the trade will make them de-minimis compared to margin finance.