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Hedge Household Expenses - Families Can Learn Corporate Finance Secrets

Inflated prices for household essentials won’t sabotage your family budget if you learn how to hedge rising costs.

When a transportation company anticipates rising fuel costs, do you think executives just sit back and brace for the hit as operating costs explode? No, of course not. They use simple techniques to offset the extra expense.

Yet most American families do nothing to protect themselves, even when newspaper headlines scream at them about rising gas prices and/or grocery prices? Can it be so hard to learn how to hedge household expenses?

It’s not hard, but it can be expensive. The fact is even transportation corporations -- or big business of any kind -- must risk something to get something, such as reduced fuel bills.

Here’s how it works. Fuel costs rise. A transportation company, such as American Airlines, can’t afford to pay more for fuel and provide competitive ticket prices. If fuel prices go up they’ll have to charge more air fare to cover the extra expense. That’s bad news to the consumer and could hurt business.

So the corporation trades in the fuel market. This is called hedging. As the price of crude oil, which is refined to make gasoline and heating oil, begins to rise the corporation tells its trading division to get involved by trading in the futures, or commodities market. The corporation already has an existing account which allows them easy access. As prices rise their goal is to profit from the move, thereby offsetting the higher fuel bills they’re bound to pay.

Let’s review what our fictional company just did. They recognized that they can’t control the price of fuel. But they can trade it. If their traders are skilled, they’ll make money. This money – otherwise known as profit – is then used to pay for rising costs.

Could American families do the same? Sure. Are there risks? You bet. The Commodity Futures Trading Commission (CFTC), which regulates all futures markets, has made this simple disclosure the law: there is risk of loss when trading futures. Past performance is not necessarily indicative of future results.

Has this disclosure sufficiently frightened you away from trading futures? In a sense, it’s meant to: The CFTC doesn’t want inexperienced people to suffer losses they can’t afford. And they know there are many brokers or sales people out there who make financial promises they can’t keep with phrases like “guaranteed,” or “it’s a sure thing.” These types of phrases are illegal, according to the CFTC.

But everything has risks. Driving, sky-diving, snow-skiing, and even the beloved stock market all present risks that training can help overcome.

Although corporations trade millions of dollars in commodities, families can easily begin with a few hundred or a few thousand dollars, if they know what they’re doing.

And whereas the fuel market can be tricky and wicked, with prices swings up and down, other markets such as corn, wheat and sugar are not quite as volatile and don’t require as much money to trade.

Another excellent market is the 30 Year U.S. Treasury bond. Many newcomers may think this market is complicated. But, in fact, much can be learned about our economy by watching this one market. And since in general it moves the opposite of interest rates, this is an excellent market to use to hedge another major cost – your mortgage.

The Chicago Board of Trade website provides free information about trading markets, such as bonds, the Dow Jones Index, and grains. Go to their website and click education>publications to peruse what they have to offer. Begin with the excellent book, “Trading Futures - An Introduction.”

Take your time when learning. You’ll save money by going slowly. Don’t believe hypes about “hot markets that can’t lose.” Nonsense. People lose money even in the most obvious bull markets because they don’t know how to trade.

Start looking for bargains, just as you do at the grocery store. Corn and wheat, which obviously are used in many food products you buy every week, were near historic lows in the summer of 2006. And despite their recent rise, some experts expect grain prices to continue climbing in the next few years. The same goes for sugar. The sweet stuff rose significantly in 2006, but could go much higher. Also, keep in mind, sugar and corn are considered major contenders for most popular alternative fuel as rising crude oil costs push gas prices higher.

You can also learn to trade the meat and currency markets. Have you noticed the value of the U.S. Dollar is dropping? Well, guess what, when the American buck goes down other currencies, such as the Euro and Swiss Franc or Canadian Dollar, actually rise. And the amazing thing about the futures currency market is that people like you can learn to make money two ways: when markets go up, and when they go down.

Many companies offer home-study course that claim you can “get rich quick” by spending lots of money on their software or advisories. Buyer beware. To get rich trading futures and options takes practice. And let’s face it, you don’t have to get rich quickly to benefit from hedging your household costs. If you could make an extra $400 per month, wouldn’t that help lighten the financial load?

The moral of the story: You don’t need to spend thousands of dollars on fancy software to learn how to trade. Common sense makes clear that you must learn before you earn. And a lot of great info is available for free on the internet.

Despite the challenges of learning to trade, if you can make money to offset rising household expenses, isn’t that worth the time it takes to study? I know my answer. What’s yours?

Copyright 2006

Douglas Glenn Clark is the author After The Noise and T-Bonding with the Trend, and the founder of the wealth blog http://AfterTheNoise.blogspot.com Clark teaches simple methods for creating wealth. Visit http://AfterTheNoise.com for free e-books.

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