[Anonymous]

Not CPA exam related, but can someone in with some finance knowledge explain to me how hedging works? I just started a new job with a grain company and I’m kinda embarressed to ask these big questions still as Dec 1 was my start date. I’m still on the Fake it til you Make it Train.

[Fanalyst]

We also use Equity Forwards to issue common stock, which on the surface sounds like you are shorting your own stock but actually has its advantages.

We basically lock in a price (ex. $30/share) for a set amount of shares (ex. 10 million shares) for a set term. Then we periodically issue pieces of the 10 million shares over the term of the contract. The bank that we contracted the forward with wins if our stock price has gone up when we issue, and they lose if it has dropped.

The purpose and advantage of an equity forward is to maintain your stock price. By issuing small amounts over time as opposed to one big secondary offering, you don't dilute EPS as much. Plus, investors can't back you into a corner and force lower pricing.

[Author]

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