Price Risk Management

Interested in hedging product price risk?

Most commodity products have high price volatility. The ill-effects of that volatility can be limited through the use of price-risk management tools, offered by banks, brokers and exchanges. Metals, agricultural products and most energy products have for years had an active price risk management market. Commodity products linked to the forest products industry have recently joined this development.

In the old times, price discovery, and with it the trading, were based on a physical delivery concept. If you did not like the price on the settlement date, you delivered or received the product itself. Nowadays, more and more products in exchanges (futures, options and other such derivatives) are traded on cash settlement basis. The so-called OTC (over-the-counter) products offered by the banks are also cash-settled. For cash-settled price risk management products, reliable indices are needed. Those indices have several other uses, too.

Hedging in detailsToggle

The key to any successful derivatives market is a strong and reliable index. Market participants must have faith and trust in the Index and it must reflect actual market prices. The majority of commodity markets have massive, liquid, derivatives (financial) markets which trade multiples of the actual physical products. Examples would be Oil, Gas, Coal, Copper, Gold etc. The producers and consumers are able to use these markets to protect, manage, secure and reduce risk on the price volatility of the physical commodity. Price hedging can be from the short term of a few months, all the way through to 5 years or even longer.

FOEX PIX indices are used as benchmarks for price risk management tools by banks, brokers & other financial institutions (OTC-SWAPS) and by exchanges. CME in Chicago is trading pulp futures and options; they also clear swap-deals (as so-called block trades) with PIX NBSKP Europe and PIX BHKP Europe pulp indices as reference prices.

The graph below describes the basic principles of price risk hedging, where the market price index tracks the price development of the physical commodity, and triggers compensation between the hedging client and the bank/financial institution providing hedging services.

While the traders of derivates are taking a risk by ‘putting their money on the table’, the industry can use these future prices to reduce risk. For the commodity market, traders will look at the fundamentals of the underlying market as well as the macro economic picture in trying to predict what will happen to prices going forward. Prices are then quoted as an average Index price over the term of the contract, valued against the Index price at each agreed settlement.

At its very core, the benefit of using an Index to hedge prices is that one can replace unknown prices in the future, with known prices today for business exposure in the future. Most commodity products have high price volatility. The use of price risk management can be seen as an insurance against the ill-effects of that volatility.

Nordea Bank

Nordea Bank operates in pulp and paper finance world wide, having offices on every continent with excellent contacts and a wide customer base both in forest industry and finance.

Nordea has provided important risk management values to customers with the pulp and paper operations. In addition to this, Nordea Bank is active in forest industry related project finance and capital markets in all their forms. In price risk hedging matters, please click company name above or ad banner to link yourself to Nordea Bank, or phone +358 9 3695 0314.

Sampo Bank PLC

Sampo financial group offers investment, savings and traditional banking services to retail, corporate and institutional customers. The group was formed at the beginning of 2001 when Sampo, a leading insurance group, and Leonia, a leading banking group joined forces, soon to be added by Mandatum, a specialist in private and investment banking. In 2002 the insurance services were integrated into a Nordic insurance group, If, of which Sampo is the largest shareholder. Sampo Bank became part of Danske Group in 2007.

Sampo has introduced trading operations in Commodity derivatives. Commodity financial product groups are: Pulp and Paper, Electricity, Energy and Weather. Sampo’s main commodity objective is to offer its client Enterprise Wide Price Risk Management Solutions. Instruments are mainly OTC structures using commonly known indexes such as PIX Indexes by FOEX Indexes Ltd as benchmark values. For further information, please contact Mr Juho Tiri: juho.tiri(at)danskebank.com: +358 10 513 8710

Skandinaviska Enskilda Banken - SEB

SEB offers a full range of commodity services for managing commodity exposures both from a risk management and investor perspective. Our reach in commodities covers all the major sectors - from energy and agricultural commodities to industrial and precious metals. Our advisory driven approach is based on extensive analysis and understanding of our customer's business processes as well as market fundamentals.

We are also an active counterparty in pulp markets. Please do not hesitate to contact us for further information.

Finland: Jussi Lepistö, +358 9 6162 8521, jussi.lepisto(at)seb.fi

Sweden: Niclas Egmar, +46 8 506 23455, niclas.egmar(at)seb.se