MANAGING COMMODITY PROCUREMENT RISK THROUGH HEDGING

The key to corporate value is in making good investments and in harvesting the cash flows from these investments through effective execution. The latter is improved through stability of plans. Cash flows, however, can be disrupted by movements in external factors such as exchange rates, commodity prices, potentially compromising the stability of plans and, in the worst case, undermining the company's ability to invest in otherwise good opportunities. Risk management is therefore directed at providing increased stability of plans, increased fidelity to strategic budgets, and, in the process, at understanding better the supply markets. The particular focus in this paper is on financial hedging tools designed to limit procurement exposure (i.e., control the maximum hedge-adjusted spend) within the context of highly volatile commodity markets.