Managing Commodity-linked Costs and Currency 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

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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