How to see the future

“The best way to predict the future is to create it.” - Abraham Lincoln

It was that time of the year again at Fancy Gizmos – budgeting. Sally, the CFO, was wrestling with a tangle of IF statements in her forecast spreadsheet when she was distracted by … music? She got up to investigate the source of the disturbance. She found John, the head of procurement, drumming on his desk to music playing from his computer. Hadn’t she asked him to help her with the copper budget rate for Fancy Gizmos? John realized he was about to face Sally’s music, probably heavy metal. A pre-emptive strike was needed. As Sally opened her mouth he quickly said “… and that’s a wrap. I have found five songs with copper in the title for the annual trivia evening. Not bad eh?”. “Well here’s some trivia for you,” Sally said. “I need the copper budget rate paper by 4pm today, so I can complete my company forecast for the board meeting.”

John knew the importance of the annual copper price budget rate to Fancy Gizmos. It was widely used throughout the company for cash flow forecasting, performance reporting, price setting, risk management and even production estimates. The budget rate wasn’t a forecast but rather a maximum target copper price the company needed to achieve for successful financial performance. John got to work on the memo. He explained that the budget rate had to have elements of so called ‘SMART’ goals, that is be specific, measurable, achievable, realistic and time bound. The budget rate was the all-in cost of copper that the company could realistically achieve over the next financial year.

He logged in to Forge aHedge – his dedicated tool for managing commodity price risk that powered the company’s hedging. First, he extracted a daily price chart of the copper price over the previous five years, complete with descriptive statistics and volatility calculations. Whilst previous price movements were not a predictor of future prices it was useful for the board to see the potential movements in the volatile copper price. Then he used the system to display the current forward curve of the copper price over the next 12 months. Making sure he had Fancy Gizmo’s latest copper purchase forecasts in the system he quickly calculated the projected effective copper prices they would currently achieve for the market forecast as well as several alternative scenarios representing both higher and lower prices. As the system already had the policy hedge ratios that he had to ensure he complied with, he reran the effective price calculation with a comparison portfolio illustrating maximum hedging.

“It’s a pity Forge aHedge is so easy to use and quick, I don’t have enough time to work out which version of “Copper Kettle” is my favorite. With everything set up, he could easily iterate through several budget rate alternatives, and calculate a realistic rate for the memo. Quickly copying the some charts from Forge aHedge, he completed the forecast for Sally. “I’m a rock star”, he thought as he pushed send on the email. “James Taylor’s got nothing on me; I’m the one who’s really laying down the copperline!”