Companies adjust financial protection periods to cope with price fluctuations.
In scenarios of strong price fluctuations in essential inputs, companies are exposed to risks that can affect investments, jobs, and even the supply of entire sectors of the economy. To reduce this vulnerability, many resort to financial protection instruments, known as hedging. In addition to defining the volume to be protected, these companies need to decide how long to maintain this protection, a choice that directly impacts their ability to weather periods of instability.
A study conducted by Rafael Schiozer of FGV EAESP , in partnership with Håkan Jankensgård and Nicoletta Marinelli, investigates the factors that determine the duration of these contracts, known as hedge maturity. The study, published in the Journal of Commodity Markets , analyzed manually collected data from 124 oil and gas companies in the United States between 2013 and 2016, gathering over a thousand observations on hedging contracts, debt structure, investments, and operational characteristics.
The results indicate that the adoption of long-term financial hedges depends primarily on the availability of collateral. The longer the contract term, the greater the risk assumed by the financial counterparty and, consequently, the greater the collateral requirement. Companies with more cash, financial reserves, or physical assets are therefore able to maintain hedges for longer periods.
The study highlights this mechanism during the 2014 oil price shock, when the price per barrel fell by about 50% in a few weeks. In this context, reserves used as collateral lost value rapidly, limiting access to long-term contracts for companies with lower liquidity. Companies with alternative collateral, however, were able to preserve more lasting protections, even in the face of this adverse scenario.
The research also shows that companies tend to align the term of financial protection with the duration of their debts and investment plans. When financial commitments are long-term, extending the hedge helps reduce uncertainty and maintain room for investment, even in highly volatile environments.
Another relevant factor identified is operational flexibility. Companies with a greater capacity to quickly adjust their production, such as those involved in shale exploration, are less dependent on long-term protections. This flexibility acts as an additional defense, allowing for more agile responses to market changes.
Although technical, the decision regarding hedge maturity has concrete effects on the financial security of companies and its impacts on the economy. Research indicates that the combination of available collateral, debt structure, investment planning, and operational flexibility is fundamental to navigating periods of crisis, preserving jobs, stabilizing prices, and sustaining essential investments.
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