What is “locking in” or hedging ?
Users of a commodity, such as natural gas, have several reasons for wanting to “lock in” or “fix” the price of that commodity. Obviously end users are not speculators, those who purchase an interest in a commodity in anticipation of a price change from which they can profit. End users buy a commodity as the raw material for, or input into, their primary business, from which they expect to derive a profit.
It should be noted that fixing the price of a commodity is normally carried out as a separate process from acquiring the physical supply of that commodity, although both can sometimes be done at once. Acquiring physical supply, in terms of the BC based natural gas market, should be seen as a separate activity. It involves numerous parameters, such as pipeline space and interconnecting utility arrangements, which make it unwieldy to react to the rapid price volatility of the commodity. Locking in, as referred to herein, means the trade of a variable price for a fixed price, with the underlying assumption that the customer will or has arranged a physical gas purchase at the variable price arrangement being traded.