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Status quo assessment
Objective:
Assess the current state of the company’s exposure to commodity price risks and the need for a hedging framework.
Key activities:
- Analyze historical and projected commodity usage and related price fluctuations.
- Quantify the financial impact of price volatility on margins and cash flows.
- Identify existing risk management practices and gaps.
- Engage key stakeholders to understand risk tolerance and objectives.
Strategy development
Objective:
Define the company’s target approach to managing commodity price risks through hedging.
Key activities:
- Set clear hedging objectives aligned with business goals (e.g., cost stabilization, margin protection).
- Draft a hedging policy outlining instruments, risk limits, and governance structures.
- Select suitable hedging tools (e.g., futures, swaps, options) and counterparties
Implementation
Objective:
Operationalize the hedging strategy and integrate it into the company’s processes.
Key activities:
- Establish or upgrade systems for trading, monitoring, and reporting hedges.
- Train internal teams on hedging mechanics, policies, and compliance requirements.
- Set up workflows for dynamic adjustments based on market conditions and operational needs.
- Execute initial hedging transactions based on approved strategies.
Performance review
Objective:
Evaluate the effectiveness of the hedging strategy and refine it for continuous improvement.
Key activities:
- Monitor and measure hedging outcomes against predefined KPIs and benchmarks.
- Conduct regular reviews to ensure policy compliance and governance standards.
- Adjust the strategy based on changes in market conditions or business objectives.
- Report results and lessons learned to stakeholders, incorporating insights into future strategies.