What it means
Many businesses face recurring commodity exposure: a factory may use natural gas every month, while a producer may sell output throughout the year rather than deliver everything on one date. A single futures contract covers one specified delivery period, so a strip links several such contracts so that the hedge calendar can follow the business's expected exposure calendar.
For example, a one-year monthly strip may contain twelve delivery-month contracts, which differs from continually closing the nearest contract and buying a later one because the later months are included from the outset. Buying the strip can help a purchaser offset price increases, while selling it can help a producer offset price falls, provided the futures and physical exposure have suitable relationships and the quantities are correctly matched.
A strip does not necessarily fix the entire delivered price. Local basis, transport charges, taxes and differences between the actual product and the futures specification can remain outside the hedge.
The average strip price is useful as a summary, but individual months matter. Seasonal demand can make winter gas contracts more expensive than summer contracts, so a business using more gas in winter needs to consider its consumption weights.
An equal quantity in every month produces an unweighted average, whereas if monthly usage differs a weighted average better represents the budget exposure, although actual contract sizes may prevent a perfect match. A strip can avoid repeated decisions to roll a short-dated hedge.
However, distant-month liquidity, execution spreads and funding requirements can affect the cost and practical availability of the chosen horizon. The transaction can also be speculative, since a trader without an offsetting physical exposure can buy or sell the strip based on a view about future prices, but using several months does not turn speculation into a hedge.
An execution record should identify every delivery month and quantity. Check whether the order filled as a package and what component positions were booked, then reconcile them to the business forecast.
Before expiry, choose the permitted closing, rolling or settlement route for each contract. A strip spanning a year does not delay all obligations until the year's end; the first month's contract reaches expiry before the later ones.
In practice
Real-world examples.
Example
A gas-consuming factory hedges the next six monthly purchase periods. Its strip contains six relevant futures expirations, while separate analysis estimates the local delivery premium that the futures hedge does not lock.
Example
A producer sells a three-month strip against planned output. When maintenance reduces the middle month's production, the team revisits that month's hedge quantity rather than assume the original package still matches the revised forecast.
Example
A company uses twice as much energy in winter as in summer. An equal-contract strip may under-hedge winter and over-hedge summer, even if its simple average price appears close to the annual budget assumption.
Formula
Calculation
An illustrative weighted strip price equals the sum of each monthly price times its planned quantity, divided by total planned quantity. For three equal units at prices of $3, $4 and $5, the average is $4. If quantities are one, one and two units, the weighted average becomes ($3 + $4 + $10) / 4 = $4.25; this ignores basis, fees and contract-size constraints.Case study
Seen in the real world.
Fictional case study: Juniper Ceramics purchased a twelve-month gas futures strip after volatile energy costs damaged its budget. The finance team initially applied the simple average futures price to every month of expected usage. Production planning revealed that winter kiln demand was higher than summer demand.
In addition, the factory's delivered gas price included a regional premium that moved independently of the quoted futures contracts. Juniper revised the budget using monthly volumes and a separate basis assumption. It kept a component-level hedge register and a margin cash reserve, finding that the strip helped organise exposure but did not remove consumption uncertainty, local price differences or daily funding needs.
Watch out
Common mistakes.
- Assuming the average strip price fixes every part of a delivered bill. Basis, transport and other charges may remain variable.
- Treating equal monthly contract sizes as a perfect match for uneven physical usage. Compare the calendar and quantities, not only the annual total.
- Forgetting individual expirations and margin demands. A grouped trade still contains contracts that settle and mature at different times.
Questions
People also ask.
Must a strip cover a full year?
No. It can cover another run of consecutive delivery periods, subject to product listings and execution arrangements. Match the length to the exposure.
Is a strip always a hedge?
No. It is a position structure. It becomes a hedge when it is used to offset an identified exposure with suitable timing, quantity and price relationships.
Is a strip better than rolling futures?
Neither is always better. Compare the available curve, liquidity, fees, forecast uncertainty and funding needs. Buying later months now changes the exposure compared with acquiring them later.
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