“Nature hedges by cultivating resilience.” - Hendrith Smith.
We’re getting to know John, the Head of Procurement for Fancy Gizmo. John is progressing nicely up the commodity risk maturity ladder. Nearly a year ago, as a first step, John hedged 50% of Fancy Gizmo’s forecast copper purchases for the next 12 months.
John is a keen amateur zoologist and he loves analogies. He’s reading an interesting article on lemmings. A worrying thought struck John. “Am I a lemming?” he wondered, referring to the so called Lemming Effect, describing people who blindly follow the behaviour of a group even when the behaviour is dangerous. “Of course not!” he declared to himself. “I’m normalizing risk management for Fancy Gizmo. How can I be? Those ‘risk managers’ who convince each other not to hedge are lemmings; I won’t fall off a commodity price cliff!” Somewhat smugly John settled back to finish reading the article.
Suddenly, the satisfied smile vanished from John’s face. “I might not be a lemming but my commodity hedges are reaching a cliff!” he realized. John opened his commodity risk management policy that he had drawn up using the template from Forge aHedge. In order to avoid issues like sudden drop offs in hedging levels his policy required an ongoing system of layered hedging.
To execute his layered hedging strategy each quarter John obtains an updated 12 month copper purchase forecast. His layered hedge policy uses a so called ‘declining wedge’ formation, where the proportion Fancy Gizmo is required to hedge reduces each quarter. Each quarter he uses the Forge aHedge system to upload the latest copper purchase forecast and assess his compliance with the company’s hedge ratios. From the system he is able to easily see where he generally needs to “top up” his hedges, automatically creating and executing the deals. The layered hedging strategy allows him to smooth out the volatile copper price and bring much better price predictability to the production and sales teams.
“No cliffs for me,” he smiled smugly again, “but gentle rolling hills!”
At Forge aHedge we are delivering easy-to-use, powerful commodity and fx hedging tools. We aim to transform companies’ commodity risk management.
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