Rising prices force corporates to think or rethink their approach to hedging commodity price risk, because on its own, the ever present volatility of commodity prices is enough to affect the cost structure of most businesses.

Originally companies handle commodity price risk management through their purchasing departments, but now treasurers are seeing the direct impact of commodity prices on profit and loss, which results in commodity risk been managed by treasury as a financial risk like any other.

Putting commodity risk management in the hands of the finance team may be an important first step, but it is just the start of the process of building an effective hedging strategy. Any organization that faces risks due to volatile commodity prices benefits from applying risk management strategies and develop a hedging strategy in line with the corporate strategy. Instruments that are used for commodity hedging & risk management are futures, options, and over the counter derivatives.

Managing and forecasting the risk exposure of the corporate portfolio is determined by the strategy related to the following topics:

• Accurate predictability of the direction the prices will move
• Time element and volatility
• Risk aversion or speculation
• Value at risk
• Stress testing