The Handbook of Corporate Financial Risk Management (2nd Edition)
First published:
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Managing Commodity-linked Costs and Currency Risk
Foreword
Introduction
Theory and Practice of Corporate Risk Management
Theory and Practice of Optimal Capital Structure
Introduction to Funding and Capital Structure
How to Obtain a Credit Rating
Refinancing Risk and Optimal Debt Maturity
Optimal Cash Position
Optimal Leverage
Introduction to Interest Rate and Inflation Risks
How to Develop an Interest Rate Risk Management Policy
How to Improve Your Fixed-Floating Mix and Duration
Interest Rates: The Most Efficient Hedging Product
Do You Need Inflation-linked Debt?
Prehedging Interest Rate Risk
Pension Fund Asset and Liability Management
Introduction to Currency Risk
How to Develop Currency Risk Management Policy
Translation or Transaction: Netting Currency Risks
Early Warning Signals
How to Hedge High Carry Currencies
Currency Risk on Covenants
Optimal Currency Composition of Debt 1: Protect Book Value
Optimal Currency Composition of Debt 2: Protect Leverage
Cyclicality of Currencies and Use of Options to Manage Credit Utilisation
Managing the Depegging Risk
Currency Risk in Luxury Goods
Introduction to Credit Risk
Counterparty Risk Methodology
Counterparty Risk Protection
Optimal Deposit Composition
Prehedging Credit Risk
xVA Optimisation
Introduction to M&A-related Risks
Risk Management for M&A
Deal-contingent Hedging
Introduction to Commodity Risk
Managing Commodity-linked Revenues and Currency Risk
Managing Commodity-linked Costs and Currency Risk
Commodity Input and Resulting Currency Risk
Offsetting Carbon Emissions
Introduction to Equity Risk
Hedging Dilution Risk
Hedging Deferred Compensation
Stake-building
This chapter has many similarities with the preceding one. Therefore, we shall try to avoid repetition wherever possible, and focus on the different nature of hedging costs from revenues. Again, we are in the domain of hedging commodity and currency risk. The difference from hedging the commodity risk on the cost side will turn out to have significant repercussions for the final solution. In particular, companies that have to buy commodities are more likely to manage their risks than companies whose primary business is to sell commodities.
For example, copper producers typically leave the exposure to copper price unhedged, as they believe that the shareholders have invested in the company to gain exposure to the copper price. On the other hand, this argument doesn’t hold for a company using copper to produce electrical components, and therefore they are much more likely to hedge the exposure to copper price. Other examples we have seen are automotive companies hedging their metals exposure, airlines hedging oil price, jewellery producers and watchmakers hedging the price of precious metals, beverage producers hedging aluminium and sugar prices, steel makers hedging electricity
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