Managing Risks from Aluminium to Zinc

  • White Papers
  • 20.03.2014 07:00 pm

The responsibilities of the treasurer are expanding and commodity management is increasingly moving from procurement to treasury. In this paper, Reval demonstrates how technology can help treasurers better understand commodity exposures and more effectively implement hedging programs. 

Treasury is in different stages of transformation around the world, and what is included in treasury’s remit is different too. There is a notable increase amongst multinational corporates for treasury to manage commodity risk. We have seen this at Reval, and a recent gtnews risk survey indicates that 44% of treasurers are already responsible for commodity risk management. 
This is the case for a few reasons: 

  • Greater need for global visibility of all financial risks 
  • Understanding the correlations amongst different asset classes 
  • Optimizing hedging strategies for significant cost savings 
  • Growing volatility of commodity prices around the world 

Previously, many companies – commodity consumers – were reluctant to hedge commodity price risk as they believed their shareholders expected them to be fluctuating according to the market prices. However, the volatility and subsequent impact on the bottom line is no longer sustainable, and hence needs to be actively managed and hedged. Similarly, the banks that are financing those companies are not in favour of this volatility and are looking for more secure profit margins. 
This is relevant not only for consumers and producers of commodities, but also for many organisations that have some exposures to non-financial items. For example, airlines are exposed to jet fuel and diesel, but also to emissions as they look to reduce their carbon foot print. Retailers are exposed to fuel costs for deliveries as well as many soft exposures – wheat in the cereal, in the biscuits, and in the beer they sell, for example. Beverage companies not only are exposed to the ingredients to make the beverage, but also the paper, aluminium and plastic costs. 
Commodity exposure management is a complex area, but getting on top of commodity risks can have a significant financial impact. The following guide helps treasurers better understand what they need to determine the Return on Investment of commodity risk management: 

  • Making exposures across the company visible 
  • Monitoring and assessing risk correlations 
  • Considering the impact of IFRS 9, IFRS 13, EMIR and Dodd Frank 
  • Leveraging SaaS technology 

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