A:

In early 2007, the New York Mercantile Exchange announced that traders would be able to buy or sell futures contracts on New York Harbor ultra low sulfur diesel and U.S Gulf Coast ultra low sulfur diesel. These contracts can be used by traders to hedge against rising or falling diesel prices. The contracts started trading on the New York Mercantile Exchange on May 13, 2007. (For background reading, see A Beginner's Guide To Hedging.)

Another interesting point about learning to hedge against rising diesel prices is to understand the process by which this product is made and how it is priced in the commercial market.

One common method used to answering this question lies in learning about a petroleum product known as heating oil. This product is also known as No.2 fuel and is used primarily to heat homes and buildings by fueling furnaces/boilers. When hedging diesel prices, heating oil is important because the two fuels are produced together and are chemically similar. Diesel fuel is often priced at a stable premium to the price of heating oil, which is an underlying commodity of futures contracts listed on the New York Mercantile Exchange.

If you plan to purchase a significant amount of diesel at a later date and you also believe that the price of diesel is going to increase, you may want to take a long position in heating oil futures. This long position will enable you to profit if the price of heating oil does continue to rise prior to the date you wish to purchase the diesel.

(To learn more about futures, see our Futures Fundamentals tutorial.)

RELATED FAQS
  1. How are futures used to hedge a position?

    Futures contracts are one of the most common derivatives used to hedge risk. A futures contract is as an arrangement between ... Read Answer >>
  2. What happens if you don't hedge your investments?

    Learn the purpose, advantages and disadvantages of hedging, and find out how to utilize hedging to enhance an overall investment ... Read Answer >>
  3. What is hedging as it relates to forex trading?

    When a currency trader enters into a trade with the intent of protecting an existing or anticipated position from an unwanted ... Read Answer >>
  4. Do all oil companies received the quoted price of West Texas Intermediate for their ...

    Learn about the three benchmark oil prices, the primary factors that determine the quality of crude oil and the price it ... Read Answer >>
  5. How do I set a strike price for a future?

    Find out why futures contracts don't have set strike prices like options or other derivatives, even though price change limits ... Read Answer >>
  6. What is a cross hedge?

    Cross hedging is when you hedge a position by investing in two positively correlated securities or securities that have similar ... Read Answer >>
Related Articles
  1. Investing

    Does Wall St. Know Clean Energy Fuels Is Growing? (CLNE)

    It's been a little more than seven years since Clean Energy Fuels (NASDAQ: CLNE) went public. Since that time, investors in the company have only seen the value of their shares decline. Since ...
  2. Investing

    Margin of Error (SUN)

    Lower margins and higher expansion costs should keep Sunoco shares in check.
  3. Investing

    Determining Oil Prices With Benchmarks

    The many types of crude oil and the different sites from which it’s extracted means buyers need an easy way to value the commodity based on quality and location.
  4. Investing

    Will Raising Fuel Efficiency Standards Kill the Oil Industry?

    Diminishing returns to fuel efficiency means the oil industry is safe in the medium and long term.
  5. Investing

    Mideast Unrest Squeezes Refiners

    While shares of big oil names like Exxon and Chevron rally on higher prices, supply disruptions in the Middle East and North Africa may put the squeeze on refiners.
  6. Investing

    How To Lock In Low Oil & Gas Prices

    We provide a quick overview of how companies can manage the risk of adverse moves in commodity prices by hedging in the futures market.
  7. Trading

    A Beginner's Guide to Hedging

    Learn how investors use strategies to reduce the impact of negative events on investments.
  8. Investing

    Why Delta is Done Hedging Fuel Costs (AAL, DAL)

    Delta lost $336 million on its hedges in the last three months of the year, and while it is not taking out any new contracts for 2016, the losses on existing contracts are expected to continue, ...
  9. Investing

    Hedging With ETFs: A Cost-Effective Alternative

    The benefits of ETFs for hedging are clear and investors of all sizes are taking notice.
RELATED TERMS
  1. Sour Crude

    The name given to barrels of crude oil that do not meet certain ...
  2. Biodiesel

    A fuel derived from organic oils, such as vegetable oil, rather ...
  3. Basis Risk

    The risk that offsetting investments in a hedging strategy will ...
  4. Selling Hedge

    A hedging strategy with which the sale of futures contracts are ...
  5. Short The Basis

    A futures strategy involving the purchase of a futures position ...
  6. Long Hedge

    A situation where an investor has to take a long position in ...
Hot Definitions
  1. Index

    A statistical measure of change in an economy or a securities market. In the case of financial markets, an index is a hypothetical ...
  2. Return on Market Value of Equity - ROME

    Return on market value of equity (ROME) is a comparative measure typically used by analysts to identify companies that generate ...
  3. Majority Shareholder

    A person or entity that owns more than 50% of a company's outstanding shares. The majority shareholder is often the founder ...
  4. Competitive Advantage

    An advantage that a firm has over its competitors, allowing it to generate greater sales or margins and/or retain more customers ...
  5. Mutual Fund

    An investment vehicle that is made up of a pool of funds collected from many investors for the purpose of investing in securities ...
  6. Wash-Sale Rule

    An Internal Revenue Service (IRS) rule that prohibits a taxpayer from claiming a loss on the sale or trade of a security ...
Trading Center