Commodity Price Risk Management:
A Guide for Corporates on Hedging Strategies
In the volatile commodities market, it’s imperative for market participants to adopt hedging solutions to safeguard their operations from significant price swings, potentially leading to unexpected costs. It’s important to note that not hedging is tantamount to speculating. LMS Markets is a leading provider of commodity hedges, committed to designing derivative contracts that precisely align with your requirements, enabling efficient risk mitigation. Our extensive support across diverse markets provides you with comprehensive access, allowing you to concentrate on your core competencies while we handle the risk management.
Why Choose LMS Markets as Your Commodity Hedge Provider?
LMS Markets is a distinguished multi-asset broker and clearer based in London, offering a comprehensive suite of services:
- Tailored Financial Instruments: A wide range of financial instruments specifically designed for commodity trading.
- Exclusive Access: Direct entry to our dedicated dealing rooms in London and Dubai.
- Global Expertise: A worldwide network of experienced professionals, offering unmatched service.
- Strategic Locations: Our offices in London and Dubai act as conduits to major Exchanges in Singapore, Europe, and the United States, expanding our operational scope.
In addition to our extensive energy services, we also provide access to the global carbon emissions markets. This effort underscores our commitment to promoting sustainable development and supporting the shift towards a more eco-friendly and low-carbon economy.
Structuring a Corporate Risk Management Strategy
A successful corporate Risk Management Strategy encompasses four key stages to ensure thorough financial risk mitigation:
- Exposure Identification: The initial step involves a detailed analysis to pinpoint parts of the business’s value chain that are vulnerable to financial risks, such as fluctuations in interest rates, commodity prices, or foreign exchange rates.
- Exposure Aggregation: This phase focuses on consolidating the total value at risk from identified financial threats. It involves calculating the ‘gross exposure’—the overall value susceptible to a specific financial risk—and understanding its role within the business’s value chain.
- Hedging Transaction Execution: Armed with a comprehensive understanding of the total value at risk, the corporate treasury team then selects and executes financial instruments designed to hedge against the identified risks, thereby neutralizing or minimizing their impact on the business.
- Risk Mitigation Performance Assessment: The final, critical stage involves evaluating the effectiveness of the risk management efforts, determining how well the hedging strategy achieved the predefined financial risk management goals.
It is vital to underscore that the success of hedging activities is not gauged by the profits or losses generated by the hedging instruments themselves. Rather, the primary objective of hedging is to reduce risk, not to engage in speculation. The true measure of success is the degree to which these strategies effectively shield the business from adverse financial impacts.