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About managing commodity risk

What it means

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.

Our solutions help you manage the risks associated with fluctuating prices. The benefits 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
  • Hedging via swaps removes the possibility of margin calls and brokerage associated with using futures

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. This is how it works:

  • Swaps can be used to lock in a fixed price per unit of measurement
  • Swaps can have multiple settlement dates or one settlement date known as ‘rate-set’ periods, where a settlement will take place between your business and CommBank
  • 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 are cash settled at maturity, irrespective of whether CommBank owes you a cash payment or whether you owe the bank a cash payment. Physical commodities cannot be delivered to discharge a swap obligation.

Solutions - Options

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

Call options

  • 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 should the buyer of the call exercise their right
  • 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 for assuming the price risk

Put options

  • 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 should the buyer of the put exercise their right
  • 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 for assuming the price risk

Option structures

  • By combining put and call options, a variety of tailored structures can be built to suit your needs and reduce costs associated with the premium

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

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As this advice has been prepared without considering your objectives, financial situation or needs, you should, before acting on the advice, 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 59kb). View the Product Disclosure Statement (PDS) for Flexible Forward (PDF 127kb) and consider it before making any decision about this product. 

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