Hedging Tool for Commodities (Oil, Silver, Gold)

This hedging tool was created for year 12 Business Studies classes to help them understand the concept of hedging. The application uses live data for 3 types of commodities. These are Silver, Gold and Oil.

The following tool has several tabs with Historic Commodity Prices (based on Yahoo data) then a calculation of Hedging Metrics, Hedging Strategy Visualisation (Long and Shorts), Risk Exposure Analysis and then finally Future Hedging Prediction.

Here's a breakdown of each component in our "Future Hedging Projection" tab:

• Hedge Ratio (hedge_ratio): This figure indicates the proportion of your investment that you've decided to hedge. A hedge ratio exceeding 1, as an example a ratio of 1.09, implies a defensive stance, securing not just the existing portfolio but also accounting for potential future exposures.

• Latest Adjusted Close (Adjusted): This column reveals the most recent closing price of oil, adjusted for dividends and splits. It's your benchmark, the price at the end of the last trading session, standing at $3.75 per barrel.

• Predicted Price Adjustment (Adjusted.1): This value is meant to represent the predicted price after applying a hedging strategy. It's derived from the spot price (the current market price of oil) and adjusted by the hedge ratio calculated from the volume data. The hedge ratio is a factor that quantifies how much of the position is protected from price movements. A hedge ratio close to 1 suggests a nearly fully hedged position, meaning the strategy aims to neutralise most of the price risk.

• Volume Hedged (HedgeAmount): Quite straightforward, this number tells you how much of the commodity you're hedging. In this case, our hedging scenario involves 1000 barrels of oil, indicating the scale of the transaction and the level of risk management in play.

• Value of Hedged Position (Adjusted.2): Now, this is where it gets interesting. This number translates the hedge ratio and the volume into a dollar value, reflecting the potential monetary outcome of the hedge. If the market moves in your favor, this figure, currently at $332.36, showcases the additional value your hedging strategy has captured. It's the essence of why investors hedge: to lock in profits and mitigate risks in volatile markets.

Each piece of data is a snippet of the broader narrative of hedging. When combined, they provide a dashboard of your hedging strategy's potential performance, informing decisions that could shield your investments from market tumult or leverage favourable winds in the commodities market.

How will it work?

Regarding how advanced the hedge would work, it depends on the strategies implemented in the simulate_hedge function. The provided code simulates a basic strategy where a long position is taken when the adjusted closing price is above a 50-day Simple Moving Average (SMA) and a short position when it's below.