The Hedge Expired. The Physical Was Still on the Water.
Quote from chief_editor on April 28, 2026, 3:29 amWhen a futures hedge expires before the physical cargo arrives, the trader is exposed. How timing mismatches between hedges and physical positions create risk.
A copper trader bought 2,000 MT of copper cathode CIF Shanghai, loading at Antofagasta in October. The purchase price was linked to the LME November average. The trader sold to a Chinese buyer at the LME December average plus a premium. To hedge, the trader sold November LME copper futures.
The vessel loaded October 28. Transit from Chile to China: 30 to 35 days. Expected arrival: late November or early December. November LME futures settled November 30. The physical cargo had not arrived. The discharge survey — determining final weight and invoicing — completed December 8. The November hedge expired November 30. The physical position remained open for 8 days.
During those 8 days, LME copper declined $180 per MT. The sale was priced on December average, reflecting the decline. The hedge gain was locked at November settlement. The 8-day gap was unhedged exposure.
Exposure: 2,000 MT × $180 = $360,000. Trade margin: approximately $90,000.
The Hedge Covers a Period. The Physical Covers a Timeline.
Futures have fixed expiry dates. Physical transactions have variable timelines. The shipping, discharge, and inspection periods all introduce variability that may not align with the futures contract month.
The trader used November futures for a purchase priced on November average — technically correct. But the sale was priced on December average. The trader needed the hedge to cover from purchase pricing (November) to sale pricing (December). A single November position covered only the purchase leg.
The trader planned to roll from November to December futures before expiry. The roll cost — the spread between months — was approximately $15 per MT when planned. The trader delayed the roll by 3 days, hoping the spread would narrow. It widened instead. The trader rolled on November 28 at $22 per MT — $44,000 in roll cost on 2,000 MT. The December position was established, but the 8-day gap between December 1 and the December 8 discharge survey remained partially exposed.
The operational discipline is to map the hedging period against the physical timeline at trade booking, identify any gaps between futures expiry and physical pricing, and roll the hedge well in advance.
Roll Timing Is Not a Neutral Decision
The timing of the roll is a risk decision. The cost is the spread between contract months. Traders sometimes delay, hoping the spread improves. This is a spread bet, not hedge management.
The copper trader's $360,000 gap exposure plus $44,000 roll cost reduced the trade margin from $90,000 to a loss of approximately $314,000. The price thesis was reasonable. The physical trade was sound. The hedge structure had a gap — 8 days between futures expiry and physical pricing completion — that was not closed in time.
The futures expired. The physical was still on the water. The price moved. The gap between hedge and physical was where the margin disappeared.
Keywords: hedge expiry mismatch physical commodity transit | futures hedge expiry physical cargo, hedge roll commodity transit, hedge timing mismatch physical trade, commodity hedge maturity physical position
Words: 475 | Source: Industry pattern — documented across multiple sources | Created: 2026-04-08
When a futures hedge expires before the physical cargo arrives, the trader is exposed. How timing mismatches between hedges and physical positions create risk.
A copper trader bought 2,000 MT of copper cathode CIF Shanghai, loading at Antofagasta in October. The purchase price was linked to the LME November average. The trader sold to a Chinese buyer at the LME December average plus a premium. To hedge, the trader sold November LME copper futures.
The vessel loaded October 28. Transit from Chile to China: 30 to 35 days. Expected arrival: late November or early December. November LME futures settled November 30. The physical cargo had not arrived. The discharge survey — determining final weight and invoicing — completed December 8. The November hedge expired November 30. The physical position remained open for 8 days.
During those 8 days, LME copper declined $180 per MT. The sale was priced on December average, reflecting the decline. The hedge gain was locked at November settlement. The 8-day gap was unhedged exposure.
Exposure: 2,000 MT × $180 = $360,000. Trade margin: approximately $90,000.
The Hedge Covers a Period. The Physical Covers a Timeline.
Futures have fixed expiry dates. Physical transactions have variable timelines. The shipping, discharge, and inspection periods all introduce variability that may not align with the futures contract month.
The trader used November futures for a purchase priced on November average — technically correct. But the sale was priced on December average. The trader needed the hedge to cover from purchase pricing (November) to sale pricing (December). A single November position covered only the purchase leg.
The trader planned to roll from November to December futures before expiry. The roll cost — the spread between months — was approximately $15 per MT when planned. The trader delayed the roll by 3 days, hoping the spread would narrow. It widened instead. The trader rolled on November 28 at $22 per MT — $44,000 in roll cost on 2,000 MT. The December position was established, but the 8-day gap between December 1 and the December 8 discharge survey remained partially exposed.
The operational discipline is to map the hedging period against the physical timeline at trade booking, identify any gaps between futures expiry and physical pricing, and roll the hedge well in advance.
Roll Timing Is Not a Neutral Decision
The timing of the roll is a risk decision. The cost is the spread between contract months. Traders sometimes delay, hoping the spread improves. This is a spread bet, not hedge management.
The copper trader's $360,000 gap exposure plus $44,000 roll cost reduced the trade margin from $90,000 to a loss of approximately $314,000. The price thesis was reasonable. The physical trade was sound. The hedge structure had a gap — 8 days between futures expiry and physical pricing completion — that was not closed in time.
The futures expired. The physical was still on the water. The price moved. The gap between hedge and physical was where the margin disappeared.
Keywords: hedge expiry mismatch physical commodity transit | futures hedge expiry physical cargo, hedge roll commodity transit, hedge timing mismatch physical trade, commodity hedge maturity physical position
Words: 475 | Source: Industry pattern — documented across multiple sources | Created: 2026-04-08