Презентация - Corporate Commodity Risk Management

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Commodityvs.FXRisk—2

• Nearlyallcommodityhedginghasbasisrisk— difference

betweenhowthecommodityispricedforpurchasevs.priced

forderivatives

–ChicagomanufacturerbuysnaturalgasatChicagoCitygates

prices vs NYMEX/OTC derivatives based upon Henry Hub

prices



.

NYMEX/OTC



derivatives



based



upon



Henry



Hub



pricesinLouisiana

–Qualitativedifferencescanbesubstantial

 #2leadderivativesvs.#3leadpurchasing

• Forthisreason,FAS133hedgeaccountingissubstantially

l f diti th FX

morecomp

ex

orcommo

diti

es

an



©2008 GreenwichTreasuryAdvisorsLLC ‐10‐

Commodityvs.FXRisk—3

• Withinacorporation,FXriskisoftendiffuseandatcross‐

purposes,whilecommodityriskisgenerallyconcentratedat

manufacturing

–Aplantmanagerhasastrongincentivetomanage

commodity risk because he is focused on managing costs

commodity



risk



because



focused



managing



costs

–FXriskisoftensharedbetweentheforeignunitGMwhois

measuredinlocalcurrencytermsvsHQmeasuredinUSD

–Asaresult,commodityriskmanagementmetricsare

generallybetterthanFXmetrics

©2008 GreenwichTreasuryAdvisorsLLC ‐11‐

CommonMistake#1:PurchasingDepartment

• Lettingpurchasingmanagecommodityrisk

–Rarel

havefinancialriskmana

ementeducation

y g

–Maynothavecontrolsexperience

–Oftenmorefocusedonpriceratherthancounterpartyrisk

• Recommendation

–Treasuryresponsibility

Sil di ik i f fi

–

pec

commo

tyr

comm

tteeo

manu

actur

ng,

purchasing,treasury,controllersandseniormanagement

©2008 GreenwichTreasuryAdvisorsLLC ‐12‐

CommonMistake#2:SalesContracts

Allowingsalespeopletofixcommoditypricesinlong‐term

contractswithoutaproperreviewatcontractinceptionand

duringthecontractlife

• Doesgetbusiness(andcommissions)attheriskof

underpricing

• Escalatorclausesprovidingtheappearanceofrelief,but

perhapsnot

–Andnocalculationoftheactualoffsettothepurchaseprice

risk

FAS 133 bdddditi ik

•

FAS



133

em



ver

• Thereisnosubstitute fornotreviewingthesalescontractson

are

ularbasis

©2008 GreenwichTreasuryAdvisorsLLC ‐13‐

CommonMistake#3:NoOptions

Refusingtouseoptionsashedgesbecausetheyare“too

expensive”:

• Typically,thesearesamepeoplethatthinkevery‐thingevens

outovertime

I th d th t d fdkt ffi i t

•

no

erwor

s,

espo

an



orwar

mar

saree

ffi

,

buttheoptionmarketsareinherentlyinefficientandalways

overpriced

• Behavioraleconomicsshowthatitisahard‐wiredhuman

instincttoavoidpayingnowtoavoidapossiblefutureloss

©2008 GreenwichTreasuryAdvisorsLLC ‐14‐

CommonMistake#4:FiscalYearHedging

• Sinceplantmanagersareoftenmeasuredonmeetingfiscal

yearbudgets,thereisatendencyonlytohedgeforthefiscal

budgetyear

–Onlyuntilthenextyear’sbudgetisclosetobeingfinalizedis

the next year

’

s commodity exposures hedged

the



year s



commodity



exposures



hedged

–Asiftheriskdoesnotexistuntilthereisbudget!

• Best

racticeistohavearollin

hed



ramfora

iven

p g ggpg g

hedgingtimehorizon

–Extendyourhedgingeverymonth/quarterafurthermonth/

t t t th d f th ti hi

quar

erou



o

enewen

o



e

me

zon

©2008 GreenwichTreasuryAdvisorsLLC ‐15‐

TopicsCovered

• Growingimportanceofcommodityhedging

•

Modern corporate risk management

Modern



corporate



risk



management

• Hedgingcommodityriskvs.FXrisk

•

Common commodity hedging mistakes

•

Common



commodity



hedging



mistakes

• Understandingyournetcommodityrisk

•

Managing your net commodity risk

•

Managing



your



net



commodity



risk

• Accountingforyournetcommodityhedging

Ab GihT Ad i

•

out

reenw



reasury

sors

©2008 GreenwichTreasuryAdvisorsLLC ‐16‐

UnderstandingYourNetCommodityRisk—1

Nearlyalways,derivativesdonotfullycoverthefullpurchaserisk,aka

basisrisk,andthisbasisriskneedstobeunderstood:

1. Understandexactlyhowyoupurchasethecommodity

–Ataparticularday,suchasmonth‐end,spotprice?

–

At an average price for the month?



average



price



for



the



month?



–Baseduponwhatkindofindex(e.g.,RockyMountainFERC)

–Whatkindofspreadonthisindex‐ fixed$or%orsomesortof

slidingscale?

–Isitapurespottransactionorarepurchasesbaseduponalong‐

termtake‐or‐

contractats

ot?

py p

 ThelattercontractualexposureisaFAS133afairvalue,not

cashflow,hedge

Th i

btit t

f t lki t ll f th tt

–

ere

snosu

tit

orno



nga

a

o



econ

rac

UnderstandingYourNetCommodityRisk—2

2. Understandtheeconomicsofthecommodity

–Isitdependentuponanothercommodity?

–Isthereapersistentpatternofbackwardationorcontango?

–Subscribetotradenewsletterstounderstandthecurrentsupply

and demand factors affecting price

and



demand



factors



affecting



price

3. Talktoyoursuppliers(ortheirsuppliers)aboutpossibleOTCand

exchangetradedderivativestohedgeyourrisk

–Suppliersareingeneralthemostknowledgeablesincehedging

theircommodityriskisariskthattheyarepaidtomanage

–Findoutwhothema

ormarketmakersare

 Maybetheproducersratherthanthebanksortheexchanges

UnderstandingYourNetCommodityRisk—3

4. Talktoyoursuppliersaboutchangingthepurchasecontractterms

–Thebesthedgingsolutionistogetafixedratecontractfromyour

supplier,butthisisoftennotfeasible

–Secondbestistopriceoffofatradablederivativeindex

–

Third best is to fix the spread above the purchase index

Third



best



fix



the



spread



above



the



purchase



index

5. Havingdeterminedthebestpossiblecontracttermsandthat

derivativehedgingisyouronlyalternative,decidewhetherto

t diti h ith bk OTC

execu

eyour

vesonanexc

angeorw

ith

a

onan

OTC



basis

–Manycompaniesprefertheconvenienceofusingtheirbankers,

butmaywellpaymorethantheyneedtofortheconvenience

–Thelargertheprogram,themoretheeconomicsfavoratleast

some exchange hedging

some



exchange



hedging