Introduction to Commodity Risk

Stanley Myint and Fabrice Famery

Contents

Foreword

Introduction

1.

Theory and Practice of Corporate Risk Management

2.

Theory and Practice of Optimal Capital Structure

3.

Introduction to Funding and Capital Structure

4.

How to Obtain a Credit Rating

5.

Refinancing Risk and Optimal Debt Maturity

6.

Optimal Cash Position

7.

Optimal Leverage

8.

Introduction to Interest Rate and Inflation Risks

9.

How to Develop an Interest Rate Risk Management Policy

10.

How to Improve Your Fixed-Floating Mix and Duration

11.

Interest Rates: The Most Efficient Hedging Product

12.

Do You Need Inflation-linked Debt?

13.

Prehedging Interest Rate Risk

14.

Pension Fund Asset and Liability Management

15.

Introduction to Currency Risk

16.

How to Develop Currency Risk Management Policy

17.

Translation or Transaction: Netting Currency Risks

18.

Early Warning Signals

19.

How to Hedge High Carry Currencies

20.

Currency Risk on Covenants

21.

Optimal Currency Composition of Debt 1: Protect Book Value

22.

Optimal Currency Composition of Debt 2: Protect Leverage

23.

Cyclicality of Currencies and Use of Options to Manage Credit Utilisation

24.

Managing the Depegging Risk

25.

Currency Risk in Luxury Goods

26.

Introduction to Credit Risk

27.

Counterparty Risk Methodology

28.

Counterparty Risk Protection

29.

Optimal Deposit Composition

30.

Prehedging Credit Risk

31.

xVA Optimisation

32.

Introduction to M&A-related Risks

33.

Risk Management for M&A

34.

Deal-contingent Hedging

35.

Introduction to Commodity Risk

36.

Managing Commodity-linked Revenues and Currency Risk

37.

Managing Commodity-linked Costs and Currency Risk

38.

Commodity Input and Resulting Currency Risk

39.

Offsetting Carbon Emissions

40.

Introduction to Equity Risk

41.

Hedging Dilution Risk

42.

Hedging Deferred Compensation

43.

Stake-building

As mentioned in the introduction to this book, in some sectors (such as energy, transportation, metals and mining, and the food industry) commodity risk can be a very important component of the overall risk. What is specific to commodity risks? First, unlike currencies or interest rates, commodities come in a range of specifications.11 For an overview of commodities and commodity derivatives, see Geman (2005) or Schofield (2007). For instance, a company that needs to hedge fuel risk has to specify a variety of parameters, eg, a specific grade of crude oil (Urals, Brent, WTI, etc). Crude oil comes in many varieties and each one has a slightly different composition and price. Compare this to the currency world, where, for example, we have only one definition of the EURUSD currency rate, which is fully specified by the Reuters page (or an equivalent) on which it is shown. Therefore, any discussion of commodity risk management necessarily requires detailed specifications of the exact commodity being hedged, which is beyond the scope of this book. If those details are stripped away, managing commodity risks follow similar principles as managing currency risks.

Second, this book is

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