Future imperfect

Hedging physical deals with derivatives may be active risk management, but if the physical contract is breached, it can result in unnecessary losses. Andrew Meads looks at whether the innocent party can recover these losses

Hedging physical commodity trades in the over-the-counter or exchange markets, while usually a prudent move intended to limit the impact of sudden price movements, could also lead to costly losses if the physical contract is breached.

Whether the innocent party can recover derivatives losses in the event of a physical contract being breached is still open to debate. Two well-known cases indicate