Alcoa (AA) Uses LME As Hedge

Saying there are very few instances where Alcoa (NYSE:AA) would hedge foreign-exchange exposure, CFO Charles D. McLane Jr. said shareholders and management prefer to use the London Metals Exchange (LME) as a type of hedge.

McLane said, "We don't take a position, except in very specific circumstances. Our investors want us to be exposed to the LME."

"Changes to currencies have a direct correlation to movement in the LME price and, as a result, act as a natural hedge," McLane added.

"Aluminum sold on the London Metals Exchange is based in U.S. dollars. Selling aluminum through LME priced contracts, no matter where it is produced using local currencies, results in Alcoa's revenue being exposed to U.S. dollars. McLane said that '99.9%' of the company's revenue in its primary operations including alumina and primary ingot are in U.S. dollars," noted the Wall Street Journal.

"If we took any action, we would be increasing our overall risk," concluded McLane. "We don't sit around and guess where these currencies are going to go. If we were to hedge the cost components, we would need to hedge the revenue stream as well."

Alcoa closed Wednesday at $15.65, falling $0.39, or 2.40 percent.




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Exxon (XOM) As a Hedge Play

Assumptions that gas prices will probably continue to rise for some time makes it a good bet to invest in ExxonMobil (NYSE:XOM) as a "gas-pump hedge," according to Michael Schwartz, Oppenheimer & Co.'s chief options strategist.

ExxonMobil, one of America's largest gas-station operators and the world's largest energy company, with operations in 200 countries. At over $82 a share, Exxon is up about 15% this year, and could trade higher in unison with crude, which recently reached about $106 a barrel. The nationwide average price of gasoline is about $3.50 a gallon, and prices are unlikely to decline anytime soon.

Michael Schwartz is advising clients to consider a "gas-pump hedge." It entails buying Exxon's October $85 call and selling the October $95 call, which reduces the trade's price, as Exxon's bullish call options are elevated in widespread anticipation that Exxon will keep climbing. The total position cost $2.86 when the stock was at 82.16. If Exxon's stock advances to 95, investors will make a 250% return on their money. If the stock advances to 87.86, the trade breaks even.

In the past month, six analysts raised Exxon's earnings estimates, a sign of growing recognition that the stock has room to run higher. Oppenheimer recently raised Exxon's 12-to-18-month price target to 96, from 90. To be sure, Exxon's share price is also likely to benefit from continued demand for the Select Sector Energy SPDR (XLE), an exchange-traded fund composed of 41 names. Exxon is XLE's largest component, representing 17.6% of the exchange-traded fund, so trading action in XLE tends to lift Exxon's price.




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