okay so im not a finance guy...but im taking a futures class and im not sure about some of the more technical things that are going on....
I looked online, and all I can find are really technical definitions....i just want someone to explain in simple terms what is meant by ...paying fixed...and receiving floating....also...what do they mean by a stacked hedge? .....thanks
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"paying fixed..receiving floating" sounds like an interest rate swap. It is a contract that you enter into where you trade a future payment stream based on a fixed rate for a future payment stream based on a floating rate.
for example, I am a company with debt on which I am to make annual payments at 4% interest for the next 5 years. If I believe that the rates are going to drop to 3% in the future and I do not want to be paying the 4% while the primary rate is 3%, I would want to enter into a swap where I can trade my future payment flow at 4% for a floating rate that would adjust with the primary rate.
A good example of a simple stacked hedge is when an airline buys oil futures at today's prices and as prices steadily move so that the airline is protected in the event that the oil price moves sharply in the future.
dont quite understand, isnt this just simple hedge using futures?
A good example of strip vs. stack hedge
On March 1, an oil distributor agrees to deliver 1,000 bbl of crude oil in each of the next 8 quarters, at a fixed price. The firm faces the risk that crude oil prices will rise, and therefore will enter into a long hedge.
On March 1, the firm can either:
1) Trade 1 contract for delivery in each of the next 8 quarters (This process is known as a “strip hedge.”)
or
2) Trade 8 June contracts. Then, in May, offset the June contracts and trade 7 Sept contracts. Then, in August, offset the Sept contracts and trade 6 Dec contracts, etc. (This process is known as a “stacked hedge.”)
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