Effective Commodity Hedging for Procurement Professionals

This video introduces the basic principles of commodity hedging and other financial instruments

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Hedging is a form of insurance or risk reduction initiative against adverse moves in sometimes volatile markets such as the price of oil, raw materials and currencies. The objective of hedging is to reduce the risk of financial loss. There are a number of approaches to hedging but is there a right way to hedge? How can hedging help to improve relationships with suppliers and even generate win-win situations in those highly volatile markets?

This video will explain hedging and help you understand and if appropriate, implement a hedging programme in your company.


In companies that deal with raw materials or currency or indeed any commodity that is subject to fluctuating prices, a top concern for Procurement, Risk Managers and Finance, particularly the Treasury function is how to reduce the risk of higher future prices.

There are two common options to reducing such risk. Buyers can 

1)  agree fixed price contracts with suppliers which will transfer all risk onto the supplier or

2) hedge the financial risks internally or via a third party.

Hedging differs from speculation in that the speculator’s objective is to make a profit from volatility whereas the hedger’s aim is to reduce risk in a volatile market and to protect themselves from losses.

A hedger can be defined as a person or a company that is involved in a business related to a particular commodity. Hedgers are usually a supplier (or producer) of a commodity or a company that needs to purchase this commodity in the future (buyer). Both, producers and consumers of commodities can use the various modes of hedging to protect themselves against adverse price moves. Those modes include futures, options, forwards and swaps. Producers or consumers of commodities, who do not wish to assume the risk of price fluctuations, can reduce their total risk by hedging their cash positions in the futures markets.

Given this, for many companies, commodity hedging has become an integral part of their risk management approach and Procurement has realised that it might have to take the lead. No other department is closer to the commodity markets than Procurement, no other function understands the market rules, players and moves better than Procurement. However, this is not solely a Procurement issue and of course other departments and stakeholders have to be involved. Procurement, Risk Management and Finance have to find the right “trade-off” between hedging and other risk management options to manage any volatile procurement spend properly. However hedging has its own risks and it is important that hedging occurs only where there is a material risk to the company.

Faculty name: Steve Smiley
Duration: 23:04 Min.
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