Need help with hedging?

Theseus volunteered to enter the Labyrinth on Crete and kill the Minotaur, a monster that was half man and half bull. Ariadne, the daughter of King Minos, fell in love with Theseus and gave him a sword and a ball of thread. Theseus tied the thread at the entrance so he could find his way back through the maze. He killed the Minotaur and escaped by following the thread. Fascinatingly, the modern word ‘clue’ originates from the Middle English ‘clewe’, meaning a ball of thread,

Atlas sided with the Titans in their war against the Olympians. When the Titans were defeated, Zeus condemned Atlas to hold up the sky on his shoulders, alone, forever. The moment he stepped away, it would fall. Today he gives his name to the Atlas Mountains, the Atlantic Ocean, and of course, the eponymous geography guide. A lot of treasuries are built on an Atlas. One person knows the exposures, the hedge ratios, the bank relationships, the reasoning behind every position.

In Greek mythology Daedalus made wings of feathers and beeswax for himself and his son, Icarus, to escape from imprisonment. He gave Icarus one instruction: fly the middle path. If you fly too low, the sea spray will soak and weigh down the feathers. If you fly too high, the sun will melt the wax. Enraptured by the thrill of flying, Icarus ignored his father’s warnings and soared higher and higher. The Sun’s heat melted the wax, causing the feathers to fall, and Icarus to plu

Welcome to our series where we examine different hedging myths and use heroes and heroines from Greek mythology to help teach us the truth behind each myth. We'' learn about the treasurer in love with his own forecast, the one rolling the same boulder uphill every month-end. and the risk manager who hedges everything but his heel. Our first myth is "we'll hedge when prices are heading up." Who is the first hero in our series where treasury myths meet Greek myths? Narcissus, o

What is a Target Redemption Forward (TARF)? The hidden risks of this exotic FX option. If Lewis Carroll had been a risk manager he might have written: “Beware the TARF my son The vol that bites, the losses that snatch Exotic options are no fun When you learn there’s always a catch” TARFs (or Target Redemption Forwards) are complex foreign currency derivatives (a form of exotic option). In essence they provide enhanced protection against adverse currency moves but terminate if

How Pandora is hedging gold and silver out of its business — A commodity risk strategy case study. Fifteen percent. That's how much Pandora's stock has jumped after Q1 results landed this week. That's somewhat unexpected given the Q1 result headlines: - revenue down 3.3% - like-for-like sales flat, - EBIT margin compressed 140bps - North American like-for-like sales down 2% So why the rally? Because the earnings call revealed one of the more interesting commodity strategi

Why Procter & Gamble doesn't hedge commodities — and the case for natural hedging. One billion dollars. That’s the profit hit Procter & Gamble says it could face in FY27 from rising oil costs. The company has a policy of not hedging commodity costs with derivatives. With such a large potential loss it seems strange then to ask "should they have hedged"? But P&G's commodity risk strategy isn't an oversight — it's an explicit choice. They prefer to use “natural hedging” - a glo

Does selling options have a role in commodity risk management? Many commodity risk managers would shy away from even using options in the more traditional risk sense - buying calls to protect against rising prices or buying puts to protect against falling prices. But a recent intriguing article (https://iml.com.au/why-options-arent-as-risky-as-you-might-think/) from an equity fund manager in Australia, made an interesting argument about enhancing returns through intelligent o

Proactive vs reactive risk management: lessons from Barings, Enron and Wizz Air Would you drive your car by only looking in the rear-view mirror? Probably not, but that's how many companies approach risk management - only implementing hedging after being hit by a major adverse price move. Reactive fixes in finance are far too frequent. Consider a few examples: Barings Bank - controls after the collapse Due to weak controls, Nick Leeson built up huge unauthorized derivatives p

Implied vs historical volatility explained: what rising vols mean for your earnings John, our by now well-known Head of Procurement for Fancy Gizmos, was sitting at his desk and working through all the New York Times puzzles. Since he had implemented Forge aHedge and automated his copper hedging and risk management he had freed up a lot of time cleaning data, downloading forecasts, and checking and double checking a sprawl of spreadsheets. I mean he had to use his extra time

Using call options and collars to hedge commodity risk in an acquisition By now you should be well acquainted with John, the Head of Procurement for Fancy Gizmos. John has normalized commodity risk management for Fancy Gizmo. He has built commodity risk management into a routine business practice and the benefits are well understood throughout the business from the factory floor to the board. He’s reviewing his daily automated, compliance and risk email from the Forge aHedge

What is layered hedging? Using a declining wedge to avoid hedge cliffs 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?”

What goes in a commodity risk management policy? A governance framework. Last article we met John, the head of procurement for Fancy Gizmo. After reading some articles on the Forge aHedge website, John is progressing up the commodity risk maturity ladder. One day as John is sitting thinking what his next step should be, he’s disturbed by his boss, Sally, the CFO. “Dr Copper”, she affectionately calls him now after he helped smooth out recent market volatility, “I need help.”

First steps in commodity hedging: forecasting exposure and your first hedge “Even the greatest was once a beginner. Don’t be afraid to take that first step.” - Muhammad Ali. In our previous article we discussed a simple scale for assessing your commodity risk management maturity, starting from Naïve, progressing through Novice, Normalized and finally to Natural. Let me introduce you to John. John runs procurement for Fancy Gizmo Limited. A key component in Gizmo production i

The commodity risk maturity ladder: Naïve, Novice, Normalized and Natural "You're only young once, but you can be immature forever." - Germaine Greer. Have you ever benchmarked where your organization sits on a risk maturity scale? David Hillson devised a useful scale listing four increasing levels of risk maturity: Naïve, Novice, Normalized and Natural. In order to deliver best practice commodity and financial risk management it is important to benchmark where you sit on the