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Sanjay Thoppil
Solution Consultant, Reval
April 21, 2015
Hedge Accounting for Effective Risk Management
Agenda
o Introduction to Hedge Accounting
o Benefits of Hedge Accounting
o Framework for Implementing a Program
2
What is Hedge Accounting?
o “Special accounting treatment that alters the normal accounting
for one or more components of a hedge so that counterbalancing
changes in the fair values of hedged items and hedging
instruments, from the date the hedge is established, are not
included in earnings in different periods.” (formerly SFAS
133, par 320)
3
Basic
Treatment
o “An entity shall recognize all of its derivative instruments in its
statement of financial position as either assets or liabilities
depending on the rights or obligations under the contracts. All
derivative instruments shall be measured at fair value.” (formerly
SFAS 133, par 17)
Hedge
Accounting
Introduction
4
CF
Hedge
Derivative?
Yes
MtM
No
Accrual
FV
Hedge
Definition of a Derivative:
Characteristics of a derivative ASC 815-10-15
(formerly SFAS 133, par 6)
83(a) Underlying
83(a) Notional amount
83(b) No (or minimal) initial net investment
83(c) Net settlement
Basic Accounting Treatment:
Derivatives are recorded at FMV, with changes in
FMV recognized currently in earnings
Hedge Types:
• Cash flow hedges are recorded at FMV with
effective changes in FMV deferred in OCI
• Fair value hedges are recorded at FMV with
offsetting gains and losses on the hedged item
recognized currently in earnings
Major Provisions of Hedge Accounting
5
o Documentation
– Risk Management Strategy and Objective
– Nature of the Hedged Risk
– Hedging Instrument Identified
– Hedged Item Defined
– Effectiveness Assessments and Ineffectiveness Measurement
o Effectiveness Assessments
– Regression, Dollar Offset, Critical Terms, Shortcut
o Ineffectiveness Measurement
– Lesser of the cumulative change
o Disclosures
Agenda
o Introduction to Hedge Accounting
o Benefits of Hedge Accounting
o Framework for Implementing a Program
6
Benefits of Hedge Accounting
7
Cash Flow Hedge
Trade Date Settlement
Hedge
Hedged Item
Fair Value Hedge
Trade Date Settlement
Hedge
Hedged Item
Recognize in Earnings
Recognize in Earnings
Changes in derivative value
are deferred to OCI until
the hedged item impacts
the income statement.
Changes in the hedged
item value are booked to
earnings at the same time
as when the derivative
changes.
Benefit 1: Alignment of Derivative and Hedged Item Impacts on Income
Statement
Benefits of Hedge Accounting
8
Benefit 2: P&L Volatility Reduction
Forecast Sales
Loss/Gain
FX rate at
fcst date
FX Rate
FX Forward Net Acctg Impact
No Hedge
Accounting
Loss/Gain
FX Fwd Rate
FX Rate
Loss/Gain
FX Fwd Rate
FX Rate
Loss/Gain
FX rate at
fcst date
FX Rate
With Hedge
Accounting
Loss/Gain
FX Fwd Rate
FX Rate
Loss/Gain
FX Fwd Rate
FX Rate
Cash Flow Hedge
Benefits of Hedge Accounting
9
Benefit 3: Improved Economic Hedging Performance
Transaction Timeline:
Txn Event
t0 t1
Quote Order
t2
Sale/ Revenue
Recognized
t3
Cash
Received
Rates Planning Acctg1 Acctg2
Hedge Type Cash Flow Fair Value Balance Sheet
Objective: Minimize the difference between the hedge rate and planning rate
Potential
P&L Impact
Economic Risk Accounting +
Economic Risk
Benefits of Hedge Accounting
10
Other benefits of implementing a hedge accounting program
o Improved insight into underlying business exposures
– Companies are forced to analyze, measure and monitor
business transactions on an ongoing basis
o Process controllership
– Companies are required to have proper processes and controls
Agenda
o Introduction to Hedge Accounting
o Benefits of Hedge Accounting
o Framework for Implementing a Program
11
Risk Management Framework
Hedge Accounting Lifecycle
12
Risk
Identification
Risk Appetite
Business Goals
and Objectives
Assessment
and Strategy
Definition
Execution Reporting
Roles and
Responsibilities
Policies and
Procedures
Technology
Hedge Accounting Lifecycle
High Level Derivative Lifecycle
13
Reporting
Designation Maintenance Termination
• Policy definition
• Exposure tracking
• Trade execution
• Hedge documentation
• Prospective and
retrospective
effectiveness testing
• Valuations
• Measurement
• Documentation of hedge
termination
• OCI management
Implementation Framework
14
o Policy definition:
– Types of exposures, policy for hedging, operational controls
– Embed key HA language into policy and refer trade to this
o Exposure tracking:
– Need repository to store exposure information (date, amount,
revision history, actuals etc.)
o Trade execution:
– Consider hedge accounting structure when executing trades
(e.g. are internal derivatives needed)
Designation Maintenance Termination
Implementation Framework
15
Designation Maintenance Termination
FX Hedges Eligible for HA? Type
Unrecognized firm commitment with an unrelated party Yes Fair Value
Foreign currency denominated asset or liability Yes Fair Value
Non-financial asset (e.g.,inventory or a fixed asset) Yes Fair Value
Firm commitment to purchase a nonfinancial asset Yes Fair Value
forecasted purchase or sale of a foreign currency-denominated
financial asset with a third party
Yes Cash Flow
Forecasted intercompany purchase or sale of a foreign currency
denominated financial asset
Yes Cash Flow
Receipt or payment of interest on a foreign currency
denominated debt instrument
Yes Cash Flow
Forecasted intercompany dividend No
Hedge of a forecast/firm commitment to purchase a foreign
equity method Investment or business combination
No
Implementation Framework
16
Designation Maintenance Termination
Documentation
Requirement
Details
Hedge Type Cash Flow, Fair Value or Net Investment Hedge
Objective and
strategy
Need to define what the risk of the hedged item is along with the mitigation
strategy
Risk Changes in FX, interest flows attributable to the benchmark rate, price
Assessment of
Effectiveness
Company expects that both at inception and on an ongoing basis the relationship
will be highly effective…
Methods: 1) critical terms/shortcut, 2) dollar offset, 3) regression
Hedged Item Need to be specific as to what the exposure is
Hedge Instrument Need to refer to the specific derivative
Timing Designation must be made contemporaneously
Implementation Framework
17
o Prospective/Retrospective Effectiveness Testing
– Must be performed at least quarterly
– Optimal method is regression
– Specific guidance for options, forward contracts
– Impact of basis on commodities
o Valuations
– Source of market data
– Confidence in pricing models
o Measurement
– Book to ledger after adjusting for excluded components,
ineffectiveness, lesser of the cumulative change
– Result is set of GL bookings
Designation Maintenance Termination
Implementation Framework
18
o Cash Flow Hedges:
– Regular Termination (e.g. at expiry of hedge contract)
• Amounts in OCI are reclassified from OCI to income statement in same period as
which the hedged item impacts the income statement
– Irregular Termination (e.g. failed effectiveness)
• Cumulative gain/loss on the derivative is discharged immediately from OCI to
P&L
– Management Decision (e.g. de-designation prior to maturity)
• Amounts in OCI are reclassified from OCI to income statement in same period as
which the hedged item impacts the income statement
o Fair Value Hedges:
– Cease adjusting the carrying value of the asset/liability/firm commitment
– An adjustment to the carrying value of hedged item is accounted for in the
same manner as the hedged instrument itself (e.g. adjustment to inventory
is held until the inventory is sold)
Designation Maintenance Termination
Implementation Framework
19
Other Considerations
o Advanced FAS topics
– DIG Issues
– Treasury Center/Netting
– Intercompany Transactions
– Commodities
– Cross Currency Swaps
o FAS 157
– De-minimus testing
– Credit adjusted values (at contract or on a net basis)
Designation Maintenance Termination
The Power of SaaS TRM
20
CASH MANAGEMENT
• Bank statement retrieval
• Bank account management
• Cash positioning and reconciliation
• Payments and Payment Factory
• In-house banking and Pooling
• Multi-lateral Netting
• Forecast and Liquidity Planning
• Debt & Investments Management
• Intercompany Loans
• Limit Monitoring
• Accounting
• Performance Evaluation and
Reporting
LIQUIDITY MANAGEMENT
ACCOUNTING AND COMPLIANCE
RISK MANAGEMENT
• Integrated Market Data
• Exposure Quantification / Management
• Multi-Asset Class Derivative Valuation
including IR, structured rates, FX, energy,
agriculture, metal, equity, credit)
• Credit adjusted valuations
• Hedging Strategy
• Back Office and Accounting
• Strategy Evaluation and Performance
Measurement
• Compliance with ASC 815(FAS 133
and FAS 161), ASC 820(FAS 157),
IAS 39, IFRS 7, IFRS 9, and IFRS 13
• EMIR and Dodd-Frank Reporting
• Inventory & Activity Reporting
• General Ledger
• Audit Controls
21
Questions?
Sanjay Thoppil
Solution Consultant
Reval
Sanjay.thoppil@reval.com
646.376.4095
21
Visit us in the Exhibit Hall
at Booth #616
Role of Commodity Risk Management
Within Treasury
22
Commodity Risk Operating Models
Basic
Manager
Silo risk
manager
Proprietary
trader
Portfolio risk
manager
• Risks ignored or
addressed
inconsistently
through the
organization
• Exposures
inaccurately
identified
• Material risks
managed centrally
• Focus on policy
compliance with
timely and cost
effective execution
• Supports
organization's
objectives
• Manages entire
portfolio
incorporating asset
correlations
• Specialist risk
managers
Value
Add
• Trades for profit using
value add strategies
optimizing key drivers
• Alignment of risk
management and
organization strategy
• Organization has
competitive edge on
the market
• Specialized
proprietary traders
Business
Alignment
Typically only
specialized oil,
gas, mining and
electricity trading
companies
Typical corporate
commodity risk manager
23
• Ongoing volatility
• Systems and data
infrastructure
• Skilled staff
• Hedge accounting
• EMIR
Transformation Objectives
o Ultimately deliver greater shareholder value through:
– Commodity risk management in line with risk appetite
– Greater visibility and certainty of exposures
– Enhanced control environment
– Holistic management of company financial risks
• Business case
• Budget
• Governance
• Controls
• Efficiency
• Change
• Business unit buy in
External ChallengesInternal Challenges
24
Corporate Commodity Risk
o Procurement manages relationship with supplier, both supply chain
risk and price risk
o Forces supplier to manage commodity price risk
o Supplier will add a pricing premium for the service
o Corporates may have better negotiation leverage than supplier
o Supplier may not be any better at understanding and managing price
risk
25
Corporate Commodity Risk
o Decouples commodity supply risk from price risk.
o Supplier and procurement focuses on delivery logistics.
o Treasury generally maintains risk management knowledge and resources.
They are better equipped to manage price risk.
o Allows treasury to select hedge horizon and adjust hedge coverage at their
will.
o Treasury may have historically focused on FX and IR risk and will need to
develop commodity expertise.
o Creates increased accounting demands for tracking hedges.
26

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Hedge Accounting TEXPO2015

  • 1. Sanjay Thoppil Solution Consultant, Reval April 21, 2015 Hedge Accounting for Effective Risk Management
  • 2. Agenda o Introduction to Hedge Accounting o Benefits of Hedge Accounting o Framework for Implementing a Program 2
  • 3. What is Hedge Accounting? o “Special accounting treatment that alters the normal accounting for one or more components of a hedge so that counterbalancing changes in the fair values of hedged items and hedging instruments, from the date the hedge is established, are not included in earnings in different periods.” (formerly SFAS 133, par 320) 3 Basic Treatment o “An entity shall recognize all of its derivative instruments in its statement of financial position as either assets or liabilities depending on the rights or obligations under the contracts. All derivative instruments shall be measured at fair value.” (formerly SFAS 133, par 17) Hedge Accounting
  • 4. Introduction 4 CF Hedge Derivative? Yes MtM No Accrual FV Hedge Definition of a Derivative: Characteristics of a derivative ASC 815-10-15 (formerly SFAS 133, par 6) 83(a) Underlying 83(a) Notional amount 83(b) No (or minimal) initial net investment 83(c) Net settlement Basic Accounting Treatment: Derivatives are recorded at FMV, with changes in FMV recognized currently in earnings Hedge Types: • Cash flow hedges are recorded at FMV with effective changes in FMV deferred in OCI • Fair value hedges are recorded at FMV with offsetting gains and losses on the hedged item recognized currently in earnings
  • 5. Major Provisions of Hedge Accounting 5 o Documentation – Risk Management Strategy and Objective – Nature of the Hedged Risk – Hedging Instrument Identified – Hedged Item Defined – Effectiveness Assessments and Ineffectiveness Measurement o Effectiveness Assessments – Regression, Dollar Offset, Critical Terms, Shortcut o Ineffectiveness Measurement – Lesser of the cumulative change o Disclosures
  • 6. Agenda o Introduction to Hedge Accounting o Benefits of Hedge Accounting o Framework for Implementing a Program 6
  • 7. Benefits of Hedge Accounting 7 Cash Flow Hedge Trade Date Settlement Hedge Hedged Item Fair Value Hedge Trade Date Settlement Hedge Hedged Item Recognize in Earnings Recognize in Earnings Changes in derivative value are deferred to OCI until the hedged item impacts the income statement. Changes in the hedged item value are booked to earnings at the same time as when the derivative changes. Benefit 1: Alignment of Derivative and Hedged Item Impacts on Income Statement
  • 8. Benefits of Hedge Accounting 8 Benefit 2: P&L Volatility Reduction Forecast Sales Loss/Gain FX rate at fcst date FX Rate FX Forward Net Acctg Impact No Hedge Accounting Loss/Gain FX Fwd Rate FX Rate Loss/Gain FX Fwd Rate FX Rate Loss/Gain FX rate at fcst date FX Rate With Hedge Accounting Loss/Gain FX Fwd Rate FX Rate Loss/Gain FX Fwd Rate FX Rate Cash Flow Hedge
  • 9. Benefits of Hedge Accounting 9 Benefit 3: Improved Economic Hedging Performance Transaction Timeline: Txn Event t0 t1 Quote Order t2 Sale/ Revenue Recognized t3 Cash Received Rates Planning Acctg1 Acctg2 Hedge Type Cash Flow Fair Value Balance Sheet Objective: Minimize the difference between the hedge rate and planning rate Potential P&L Impact Economic Risk Accounting + Economic Risk
  • 10. Benefits of Hedge Accounting 10 Other benefits of implementing a hedge accounting program o Improved insight into underlying business exposures – Companies are forced to analyze, measure and monitor business transactions on an ongoing basis o Process controllership – Companies are required to have proper processes and controls
  • 11. Agenda o Introduction to Hedge Accounting o Benefits of Hedge Accounting o Framework for Implementing a Program 11
  • 12. Risk Management Framework Hedge Accounting Lifecycle 12 Risk Identification Risk Appetite Business Goals and Objectives Assessment and Strategy Definition Execution Reporting Roles and Responsibilities Policies and Procedures Technology
  • 13. Hedge Accounting Lifecycle High Level Derivative Lifecycle 13 Reporting Designation Maintenance Termination • Policy definition • Exposure tracking • Trade execution • Hedge documentation • Prospective and retrospective effectiveness testing • Valuations • Measurement • Documentation of hedge termination • OCI management
  • 14. Implementation Framework 14 o Policy definition: – Types of exposures, policy for hedging, operational controls – Embed key HA language into policy and refer trade to this o Exposure tracking: – Need repository to store exposure information (date, amount, revision history, actuals etc.) o Trade execution: – Consider hedge accounting structure when executing trades (e.g. are internal derivatives needed) Designation Maintenance Termination
  • 15. Implementation Framework 15 Designation Maintenance Termination FX Hedges Eligible for HA? Type Unrecognized firm commitment with an unrelated party Yes Fair Value Foreign currency denominated asset or liability Yes Fair Value Non-financial asset (e.g.,inventory or a fixed asset) Yes Fair Value Firm commitment to purchase a nonfinancial asset Yes Fair Value forecasted purchase or sale of a foreign currency-denominated financial asset with a third party Yes Cash Flow Forecasted intercompany purchase or sale of a foreign currency denominated financial asset Yes Cash Flow Receipt or payment of interest on a foreign currency denominated debt instrument Yes Cash Flow Forecasted intercompany dividend No Hedge of a forecast/firm commitment to purchase a foreign equity method Investment or business combination No
  • 16. Implementation Framework 16 Designation Maintenance Termination Documentation Requirement Details Hedge Type Cash Flow, Fair Value or Net Investment Hedge Objective and strategy Need to define what the risk of the hedged item is along with the mitigation strategy Risk Changes in FX, interest flows attributable to the benchmark rate, price Assessment of Effectiveness Company expects that both at inception and on an ongoing basis the relationship will be highly effective… Methods: 1) critical terms/shortcut, 2) dollar offset, 3) regression Hedged Item Need to be specific as to what the exposure is Hedge Instrument Need to refer to the specific derivative Timing Designation must be made contemporaneously
  • 17. Implementation Framework 17 o Prospective/Retrospective Effectiveness Testing – Must be performed at least quarterly – Optimal method is regression – Specific guidance for options, forward contracts – Impact of basis on commodities o Valuations – Source of market data – Confidence in pricing models o Measurement – Book to ledger after adjusting for excluded components, ineffectiveness, lesser of the cumulative change – Result is set of GL bookings Designation Maintenance Termination
  • 18. Implementation Framework 18 o Cash Flow Hedges: – Regular Termination (e.g. at expiry of hedge contract) • Amounts in OCI are reclassified from OCI to income statement in same period as which the hedged item impacts the income statement – Irregular Termination (e.g. failed effectiveness) • Cumulative gain/loss on the derivative is discharged immediately from OCI to P&L – Management Decision (e.g. de-designation prior to maturity) • Amounts in OCI are reclassified from OCI to income statement in same period as which the hedged item impacts the income statement o Fair Value Hedges: – Cease adjusting the carrying value of the asset/liability/firm commitment – An adjustment to the carrying value of hedged item is accounted for in the same manner as the hedged instrument itself (e.g. adjustment to inventory is held until the inventory is sold) Designation Maintenance Termination
  • 19. Implementation Framework 19 Other Considerations o Advanced FAS topics – DIG Issues – Treasury Center/Netting – Intercompany Transactions – Commodities – Cross Currency Swaps o FAS 157 – De-minimus testing – Credit adjusted values (at contract or on a net basis) Designation Maintenance Termination
  • 20. The Power of SaaS TRM 20 CASH MANAGEMENT • Bank statement retrieval • Bank account management • Cash positioning and reconciliation • Payments and Payment Factory • In-house banking and Pooling • Multi-lateral Netting • Forecast and Liquidity Planning • Debt & Investments Management • Intercompany Loans • Limit Monitoring • Accounting • Performance Evaluation and Reporting LIQUIDITY MANAGEMENT ACCOUNTING AND COMPLIANCE RISK MANAGEMENT • Integrated Market Data • Exposure Quantification / Management • Multi-Asset Class Derivative Valuation including IR, structured rates, FX, energy, agriculture, metal, equity, credit) • Credit adjusted valuations • Hedging Strategy • Back Office and Accounting • Strategy Evaluation and Performance Measurement • Compliance with ASC 815(FAS 133 and FAS 161), ASC 820(FAS 157), IAS 39, IFRS 7, IFRS 9, and IFRS 13 • EMIR and Dodd-Frank Reporting • Inventory & Activity Reporting • General Ledger • Audit Controls
  • 22. Role of Commodity Risk Management Within Treasury 22
  • 23. Commodity Risk Operating Models Basic Manager Silo risk manager Proprietary trader Portfolio risk manager • Risks ignored or addressed inconsistently through the organization • Exposures inaccurately identified • Material risks managed centrally • Focus on policy compliance with timely and cost effective execution • Supports organization's objectives • Manages entire portfolio incorporating asset correlations • Specialist risk managers Value Add • Trades for profit using value add strategies optimizing key drivers • Alignment of risk management and organization strategy • Organization has competitive edge on the market • Specialized proprietary traders Business Alignment Typically only specialized oil, gas, mining and electricity trading companies Typical corporate commodity risk manager 23
  • 24. • Ongoing volatility • Systems and data infrastructure • Skilled staff • Hedge accounting • EMIR Transformation Objectives o Ultimately deliver greater shareholder value through: – Commodity risk management in line with risk appetite – Greater visibility and certainty of exposures – Enhanced control environment – Holistic management of company financial risks • Business case • Budget • Governance • Controls • Efficiency • Change • Business unit buy in External ChallengesInternal Challenges 24
  • 25. Corporate Commodity Risk o Procurement manages relationship with supplier, both supply chain risk and price risk o Forces supplier to manage commodity price risk o Supplier will add a pricing premium for the service o Corporates may have better negotiation leverage than supplier o Supplier may not be any better at understanding and managing price risk 25
  • 26. Corporate Commodity Risk o Decouples commodity supply risk from price risk. o Supplier and procurement focuses on delivery logistics. o Treasury generally maintains risk management knowledge and resources. They are better equipped to manage price risk. o Allows treasury to select hedge horizon and adjust hedge coverage at their will. o Treasury may have historically focused on FX and IR risk and will need to develop commodity expertise. o Creates increased accounting demands for tracking hedges. 26

Notas do Editor

  1. To understand HA you need to understand how derivatives are accounted for on your finnacial statements – they are recognized as either an asset or liability and are measured at fair value or mark to market and Marking to market your derivative transactions causes earnings volatility Hedge accounting attempts to reduce the volatility created by the repeated adjustment of a financial instrument's value, known as marking to market. This reduced volatility is done by combining the instrument and the hedge as one entry, which offsets the opposing movements. Hedge accounting attempts to reduce the volatility of the overall portfolio on financial statements. For example, when accounting for complex financial instruments, such as derivatives, the value is adjusted by marking to market; this creates large swings in the profit and loss account. Hedge accounting treats the reciprocal hedge and the derivative as one entry so that the large swings are balanced out
  2. Disclosure requirement for 161; An entity’s use of derivatives — How derivatives and related hedged items are accounted for under FAS 133 — How derivatives affect an entity’s financial position, financial performance and cash flows
  3. THIS IS A SIMPLE EXPLANATION OF THE SPECTRUM OF COMMODITY RISK MANAGEMENT OPERATING MODELS ORGANISATIONS ARE CHANGING THEIR OPERATING MODELS THROUGH TRANSFORMATION TO DELIVER GREATER SHAREHOLDER VALUE AS YOU MOVE TOWARDS THE RIGHT ….. RISK MANAGEMENT IS GREATER ALIGNED TO THE ORGANISATIONAL GOALS. THE BASIC MANAGER MANAGES RISKS INCONSISTENTLY, IGNORES THEM OR MAY NOT BE ABLE ACCURATELY IDENTIFY EXPOSURES THE SILO MANAGER MOSTLY UNDERSTAND THE CORE COMMODITY RISKS AND FOCUSES ON ENSURING EACH RISK IS MANAGED INDIVIDUALLY IN LINE WITH POLICY REQUIREMENTS THE PORTFOLIO RISK MANAGER TAKES A MORE HOLLISTIC APPROACH…. CORRELATONS ARE ALSO CONSIDERED AND RISK IS MEASURED ON A PORTFOLIO BASIS– for example FX, ALIMINIUM, SUGAR, WHEAT AND INTEREST RATE RISK are considered as portfolio ….AS OFTEN THERE ARE HEDGING SYNERGIES AS ASSET CLASSES ARE RELATED AND SAME RISK CAN BE HEDGED WITH LESS DERIVATIVES….. YOU MAY HAVE SEEN OUR RECENT CASH FLOW AT RISK WEBINAR WHICH EXPLAINED THIS IN DETAIL CASH FLOW AT RISK and EARNINGS AT RISK ARE TWO MEASURES OF RISK ON A PORTFOLIO BASIS THE PROPRIETARY TRADER are TYPICALLY A SPECIALISED TRADING FUNCTION IN AN ORGANISATION THAT HAS A COMPETITIVE EDGE …. FOR INSTANCE A MAJOR OIL SUPPLIER WHO HAS KNOWLEDGE OF SUPPLY FLOWS THAT WILL IMPACT PRICES …… Worth HIGHLIGHTING FROM A RECENT COMMODITIES WEBINAR….. WHERE OVER 50% CONSIDERED THEIR ORGANISATION HAVING A VERY HIGH EXPOSURE TO COMMODITIES 20% - Basic risk manager 22% - Silo risk manager 37% - Portfolio risk manager 12% a proprietary trader
  4. One of the reasons for moving your Commodity Risk Management program from Procurement to Treasury is to deliver greater Shareholder Value. You are achieving this by: Managing and understaing your risk appetitie by providing greater visibility and certainty of your exposures Enhancing your control over your program and Have a holistic management of financial risks. We can see some of the internal and external challenges to achieving these results in the table below. Internally you have to make a business case, procure a budget, develop governance and controls and get business buy in. Externally you are looking at ongoing volatility in the markets, an appropriate system and data, you need the appropriate staffing and understanding of regulatory requirement and hedge accounting needs.
  5. Question: When would you want to have a fixed price contract? There are a few things to note when procurement is purchasing fixed price contracts on behalf of the organization. While they manage the relationshio with the supplier both supply chain risk and price risk, it forces the supplier to manage the commodity price risk and therefore the supplier will add a premium for this service The organization may however have better negotiation leverage than the supplier does and the supplier may not be any better at understanding and managing price risk.
  6. Question: When you’re doing the transition of going from fixed price to decoupling of that risk, what were some of the learning experience for that change in governance? i.e. mandated by CFO, oversight committee of procurement and treasury As we consider Treasury managing the commodity risk some of the benefits are the decoupling of commodity supply risk from price risk Allowing procurement and supplier to focus on delivery logistics And since treasury generally maintains risk management knowledge they are better equipped to manage price risk which allows them to select hedge horizons and also ajdust hedge coverages at will. Now while Treasury has not histrically managed commodity price risk they will need to start developing this expertise to manage the overall price risk , which includes other asset classes like IR and FX. You will also need to consider the increased accounting demands for tracking hedges.