Is there a way for me to hedge my commodities positions with my equity positions?

General
2

Hmmm… extremely tough. Historically commodity markets have had an inverse co-relation with stock markets. When commodity prices go down, equity markets go up and vice versa. That co-relation has kind of gone out of whack in the last few years.

I have seen a few people who are betting that agri-commodities will be a hedge to stock markets in the long run. Basically stock markets go down when inflation is high, inflation is high would basically mean agri-commodity prices would have gone up.

Maybe the only decent corelation between oil marketing/airline stocks and crude oil prices. They are inversely related.

3

Equity can be hedged against inflation using Commodity Futures.

Inflation assists economic growth while simultaneously reducing profit margins of corporations.

The company’s equity valuation is adversely affected by the rise in inflation, especially in the short-term.

Inflation is caused by a number of factors. The price of a commodity is the most common indicator of the phenomenon.

Because of their inter-linkage, the commodity derivative market provides a profitable investment opportunity.

During high inflation period, the increase in the price of the commodities can be used to compensate the decrease in the short-term equity valuations.

Therefore, a probable loss in the valuation of assets caused by inflation can be hedged against commodities and its various derivatives.

In case your portfolio is high on equity investment, it is advisable to hedge it against commodities to counteract the inflationary economy.

Equity and commodity Futures portfolio can be valued by:

Vp (e,c) (t) = Ve (t) + Vc (t)

Where,

Vp - value of the portfolio

t - time

Ve - value of equity

Vc - value of commodity

Value of Equity can be computed as:

       m

Ve (t) = ∑ni (t) X pi (t)

         i=1

Where,

m -total number of equities in the portfolio

i - equity

n - the number of shares in the portfolio

p - the price of the equity

Value of Commodity can be calculated as:

        q

Vc (t) = ∑kj (t) X vj (t)

       j=1

vj (t) = fj (t) X e- {rf X (T - 1)}

Where,

q - commodity futures

j - commodity

k - contracts

v- value of commodity

f - the future price of the commodity

rf- risk-free rate