Managing commodity risk

Fluctuations in commodity prices and currency movements can make it difficult to plan and budget for your business. Commodity risk management offers your business protection from the negative impact of fluctuating prices at the lowest possible cost. Our commodity risk management solutions help you manage the risks associated with fluctuating prices.

The benefits of commodity risk management include:

• Plan and budget with greater accuracy
• Control costs
• Manage margins more effectively
• Create certainty around fluctuating commodity prices
• Take advantage of a strategic view of commodity prices
• Customise solutions developed for specific needs
• Remove the possibility of margin calls and brokerage associated with using futures

Risk management solutions

Swaps
Commodity swaps offer growers and consumers a fixed or floating price per unit of measurement that covers the majority of their price risk, excluding basis risk. Swaps can be used to lock in a fixed price per unit of measurement. If you are receiving a fixed cash flow, you may want to swap this for a floating cash flow for strategic reasons.

Swaps may have multiple settlement dates or one settlement date known as ‘rate-set’ periods, where a settlement will take place between your business and the Bank. These rate-set dates may be quarterly, semi-annually or customised to your needs. In the case of wheat price risk management, the payment dates may reflect the AWB Basis Pool.

Swaps cannot be extended for an additional term and are cash settled at maturity, irrespective of whether the Bank owes you a cash payment or whether you owe the Bank a cash payment.

Options
Commodity options offer growers and consumers the right, but not the obligation, to deal at a specified rate in the future.

Call options
A call option gives the buyer of the option the right (but not the obligation) to buy the underlying commodity at a future point in time (the expiry date) at a pre-defined price (the strike rate).

Upon expiry, the holder (purchaser) of the option must decide whether to exercise the option if the price is favourable, or allow the option to lapse if it is better to deal in the cash/spot market. The seller of a call option receives a premium at the beginning of the transaction and has an obligation to effect settlement. It is only the option buyer who has the ‘option’ to settle. The premium is the cost to the buyer for this ‘option’ and is compensation to the seller.

Put options
A put option gives the buyer of the option the right (but not the obligation) to sell the underlying commodity at a future point in time (the expiry date) at a pre-defined price (the strike rate).

Upon expiry, the holder (purchaser) of the option must decide whether to exercise the option if the price is favourable, or allow the option to lapse if it is better to deal in the cash/spot market. The seller of a put option receives a premium at the beginning of the transaction and has an obligation to effect settlement. It is only the option buyer who has the ‘option’ to settle. The premium is the cost to the buyer for this ‘option’ and is compensation to the seller.

Option structures
By combining put and call options, a variety of structures can be built to suit your needs and reduce costs associated with the premium. Such structures are collars, put/call spreads and ratio options.

Exotic options
Exotic options may use barriers that can ‘knock in’ or ‘knock out’ the option to alter the usual pay-off structure that is achieved through the use of normal puts and calls.

To better understand these solutions, please see our commodity risk management examples.

Talk to Commodities Specialists

For more information email us or call:

Agricultural commodities - AgriLine on 1300 245 463, 7am - 7pm (AEST)

Base and Precious Metals – (02) 9117 0069, 8am -5pm (AEST) Monday to Friday.

Oil and Energy – (02) 9117 0066, 8am -5pm (AEST) Monday to Friday

 

• Important information
  As this information has been prepared without considering your objectives, financial situation or needs, you should, before acting on the information, consider its appropriateness to your circumstances.
  All products mentioned on this web page are issued by the Commonwealth Bank of Australia, view our Financial Services Guide (PDF 56kb). View the Product Disclosure Statement (PDS) for Agricultural Commodity Risk Management Solutions issued by the Commonwealth Bank of Australia, and consider it before making any decision about the product(s).
  
  If you have a complaint, the Bank’s dispute resolution process can be accessed on 13 2221.