Question

1. LEGO toys manufacturers about 19 billion Lego elements each year. Needless to say, it a huge purchaser of plastic feedstock that is produced from oil and liquified natural gas. Given the recent turmoil in the Middle East, they wish to protect themselves from the volatility in the price of oil. Should the company be a short hedger or a long hedger in oil futures?

Answer 1

Since the company is a buyer of oil, they need to take positions through long hedging.

long hedge is hedging position which is taken by someone who is a buyer of commodity and he wants to protect the price of the commodity by going long in the price of the commodity by going through a long hedge.

so, Lego toys manufacturer must be buying future contracts of oil and protecting themselves against any kind of price hike so that their buying prices should be locked.

short hedging is only done by somebody who is manufacturing some commodity and he wants to protect the fall in the price of commodity here the company is the buyer of the commodity not the manufacturer of oil.

So company should be opting for long hedge