Strategic treasury tip 3: replace a Single Forecast with Scenarios.

Tip 3: Replace a Single Forecast with Scenarios

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Cotton pickers

Any-one who has spent much time in financial markets knows they are notoriously unpredictable. “Bottom pickers and top pickers become cotton pickers” as the aphorism goes.

In business planning and especially trying to understand the impact of price volatility on one’s financial exposures and consequent business performance (see here) treasurers can be vulnerable to a one-dimensional approach. Many treasurers or risk managers will provide a single forecast when requested of commodity costs or FX related flows. This projection is commonly based on a bank forecast or the current market curve. This is useful although bank forecasts and market curves are usually not the trajectory the market usually flows!

The forecast that wasn’t

Take oil this year. In December 2025, Reuters’ monthly poll of 34 economists and analysts forecast Brent crude oil would average around $61 a barrel in 2026. The most bullish forecast in the poll, from DBS, was $68.

Then on 28 February the US and Israel struck Iran, the Strait of Hormuz was effectively closed and the rest is history. Brent posted its largest monthly rise on record in March and briefly touched $126 at the end of April. Prices have remained elevated and volatile ever since.

This is the problem with a single forecast. A CFO who budgeted fuel or freight off $61 might have had a plan for $61, but likely no plan for $120, or for the volatility back to $73.

But this year is nothing new. See the chart below which maps the forward curve at regular intervals over the last few years. The customer might always be right but the market might always be wrong!

Plans are useless, planning is indispensable

So how does one provide a more strategic projection for internal stakeholders? It’s a bit like Eisenhower’s observation: “In preparing for battle I have always found that plans are useless, but planning is indispensable.”

The answer lies in showing the business impact of several scenarios that capture a range of potential outcomes for future FX or commodity prices. Strategic treasurers and risk managers present management with those scenarios and their impact on cash flows and key metrics. One doesn’t need to forecast a market shock but understanding and planning for adverse (or favourable) outcomes provides the strategic value treasurers and risk managers can add to their organizations.

How do I forecast thee – let me count the ways

But how does one choose a good range of forecasts? From experience 3 or 4 are more than sufficient. Assuming you are purchasing commodities we recommend using a combination of

1. High side forecast:

Ensure the adverse move truly reflects the maximum prices have reached over the last few years (or higher).

2. Flat scenario:

Rates stay the same over the analysis period. This can be omitted if the current forward is relatively flat.

3. Current market curve:

Useful for understanding market’s opinion and visualising potential hedging levels

4. Low side forecast:

Favourable scenario to understand the impact of beneficial price moves, especially to see (and explain cost of hedging). Ironically for any hedge ratio less than 100 you want your hedges to be out-the-money.

Here’s what that might look like currently for Cocoa:

(For FX be careful of the quotation basis used vis-à-vis being a net importer or exporter of the currency pair being forecast.)

With these forecasts the strategic treasurer can then calculate the business impact of each (see Tip 2). Eisenhower would then be happy as plans can then proactively be made for each outcome rather than scrambling in the face of a market shock.

Scenarios are more than price forecasts

To be truly strategic there are other factors that should be considered in scenario planning. Without going into detail running scenarios over any basis changes (think airlines and the crack spread this year), volume or exposure changes, the impact of FX risk where the commodities are being hedged in a different currency to the functional currency of the business, amongst others.

You can also look at different ways to forecast prices than manually chosen scenarios. Using a Cashflow-at-Risk approach to run a large number of scenarios generated by an appropriate Monte Carlo algorithm and producing a distribution of net revenues or costs can provide a valuable different perspective. This can help understand the impact of multiple price paths on one’s commodity or FX exposures and allows the combination of these plus incorporate other factors, like volume variance and basis risk) into a single calculation.

From scenario maestro to strategic partner

Once the scenarios are run and plans for each communicated and agreed, the last step is to tie each scenario to a trigger, so the plans don’t languish in a drawer somewhere.

A trigger and accompanying plan could be: “If gas trades above EUR 45/MWh for two weeks, we lift cover to the policy maximum and procurement opens pricing talks with key customers.” The trigger need not be an absolute price, but rather a business outcome such as the amount of EBITDA at risk at current forward prices.

When the trigger is agreed in advance, decisions and execution are quick. Reactive treasuries become proactive treasuries.

The challenge, of course, is making this a real-time, repeatable process rather than a one-off spreadsheet exercise. Platforms such as Forge aHedge can help automate scenario analysis, monitor triggers and make the process easy to implement and scale especially across a large number of commodities and currency pairs.

The difference between a forecast and a set of scenarios isn't just the number of price paths on a chart. It's what management can do with the information.

This tip moves treasury from:

“Our forecast for Brent next year is $62”

to:

“Here’s what happens to our budget surplus or deficit at $50, $62, $90 and $130, and here’s what we’ve agreed to do in each case.”

Nobody can tell management where prices will actually be in the future. Using scenarios instead of a single rudimentary forecast, a strategic treasurer can tell them what each outcome would mean, how much risk they can tolerate, and what the business can do about it.

The goal of scenario planning isn’t to predict the future, but to prepare the business for more than one possible future.

Next Tip: Don’t ask “Should we hedge?” Ask “What are we trying to protect?”