Risk Management: Hedging Strategies
Why hedging prevents you from speculation!
Hedging represents an excellent tool for a
risk management kit of purchasing
Initial situation:
Increasing demands for raw materials, for example as currently
seen in China and India, lead to long-term trends and cause
high price volatility. In this world of volatilities and unpredictable
changes the profit of your company is is in demand.
Companies dependent on raw materials or companies which
source Commodities dependent on raw materials, can drastically
reduce the risk of increasing prices or volatilities with the help of
modern financial instruments. Hedging therefore is a term that
encompasses not only these instruments but also special meth-
ods to transfer risks.
Hedging in our terms means the safeguarding of an existing
or still expanding position, e.g. of raw materials or currencies
against undesired market price developments.
Important reasons for your purchasing departments to operate dynamic hedging
Hedging is an answer to the risk scenarios connected with price
changes. Hedging enables your purchasing department to transfer
and manage risks. Therefore, your business benefits from
planning reliability (e.g. calculation with fixed prices, volatility
of your cash flow is reduced)
early recognition of trends
a competitive advantage
Furthermore a dynamic hedging strategy should give you the
opportunity to
Profit
Course of raw material
development
Loss from raw material price development
}
is balanced out against the profit from the
contract.
x raw material price
100
Planning price
Course of contract
Loss
The hedger receives a price level for a certain raw material, e.g.
copper, for a defined point of time, e.g. a year.
Therefore, neutralising the price change risk is an essential task
of hedging. This means that the purchaser has a reliable basis
for his calculation and an excellent new tool for his or her risk
management kit.
exit markets at any time
and to participate from bearish and bullish market scenarios
Without an early warning system, such as hedging, you will only
find out about price changes when your supplier passes on the
price increase to you. As a quintessence you will find out that a
professional hedge will give you an excellent support to manage
your risks.
Hedging is directly opposed to speculation. It prevents you from
speculation!
So, what do you, as a purchaser, need for a good
hedge?
To make a good hedge happen in the purchasing department you
need a special kind of information that will realize your hedging
tasks.
On the one hand you have to know how much of your commod-
ity, when and where it will be purchased. On the other hand you
should be able to choose the right financial instruments as there
are futures, options or over the counter (OTC) products that help
you to neutralize the price risks of your commodity.
An outstanding asset management system, trading and capital
markets experience plus an excellent supply chain management
consultation may give you important information. A combination,
which is hard to find either in the financial or in the purchasing
world. This combination is realized by BrainNet and its strategic
partnerships with the banks, raw material and energy traders,
brokers and certified accountants.
Workshops and trainings held by our consultants will enable you
to get your purchasing department started.

Our approach to manage your price risk

Closing the loop of risk management means in our approach: risk analysis and identification, strategy and tactics, realizing measures and
adjustments.

Risk Analyis Hedging Strategy Implementation Adjustment

Identification of relevant Identification of relevant Adjustment of

Administration
goods and materials financial derivatives your portfolio

Correlation Process planning: Process implementation,

creation of a controlling Controlling and round table
analysis and calculation roles and responsibilities
and monitoring process

Result: hedging Result: optimized

Supply chain analysis Build up purchasing and hedging
strategy and policy
of a derivative portfolio strategy

Result: business case &

Result: asset
feasibility study
management and
controlling process
BrainNet Management Consultants GmbH
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Fon: +49 (0) 228 72537-0
Fax: +49 (0) 228 72537-37
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