Background Foreign exchange and commodity bitumen markets are affected by high volatility and therefore subject to substantial risk of price changes, that will additionally be driven by speculation and influenced by political action. Increasing natural demand and diminishing resources will in the long run lead to rising commodity prices Significant data is required in order to build up an effective risk management to minimize the exposure to foreign exchange and raw material price changes. A professional risk management allows long- term budgeting of price targets and profits and offers the chance to generate savings in volatile markets.
Reviewing Facts and Figures. What risk positions (bitumen contracts, foreign currency, other commodities) does the company hold? What is the size of the positions and over what time periods are risks prevailing? How do variations of these risk components effect cash-flow, turnover and material usage? What is the size of realized/unrealized profits/losses? What is the remaining risk potential and the probability to sustain losses respectively?
Hedging Bitumen. Bitumen cannot be hedged directly but indirectly through making use of correlating tradable products, such as Heavy Fuel Oil (HFO 3.5% Sulphur) and / or Gas Oil HFO by itself performs already with a Correlation Coefficient of >0.8 However most of international bitumen contracts are HFO related and subsequently give a 100% correlation to the underlying hedge Hedging contracts are available from an underlying of 1,000 tonnes per year onwards It is possible to hedge bitumen contracts up to 60 (in words: sixty) months into the future
Modus Operandi. Risk Analysis Administration Hedging Strategy ResultIdentification of theunderlying Arrangement of Decision: Save calculation of trading account with Swap, Option, Collar purchase / sales pricesAnalysis of correlations Global Risk Mgt. in DK Monitoring SecuredDetermination of the Specification of of Markets budget andbase quantity hedging tools margins Starting, holding andAnalysis of supply chain Fixation of the liquidating positionsand foreign currency risk parameters No additional costexposure Reporting SEITE 11
Different market situations and individual purchase andsales contracts require different hedging strategies and instruments. High volatility obstructs the calculation of long-term procurement. Without hedging the company is defenceless against the volatility of the market Falling prices. What to do, if only hedged against rising prices ? Dynamic hedging! Prices are increasing steadily. How to handle that? Static hedge! Solutions: Dynamic Hedge Static Hedge SEITE 12
Static versus Dynamic Hedge A strategy using standard The derivatives strategy can beExplanation derivatives is predefined, e.g. flexibly adjusted to the actual Static buying a call option, a future Dynamic market situation, e. g. by contract or forward swap. starting, holding and liquidating positions at any time. + Low complexity and dynamic + Optimal return on the hedge setting up the hedge, easy to (return vs. cost) in fluctuationPros and Cons handle market conditions + Low cost of fees, fixed for the – Fixed return on the hedge (return whole term when entering the vs. cost) agreement – High complexity and dynamic – No windfall profits setting up the hedging strategy SEITE 13
Range of Services: a tailore made Concept Administrative implementation of accounting Monitoring of trading signals Position management Active supervision and adjustment of hedging volume Monitoring and risk management of hedging volume Daily calculation of total risk position Reporting SEITE 15
Implementation: Hedging Application for an account at Global Risk Management, Middelfart, Denmark Agreement of Credit Line Alternatively payment of an initial Margin Monthly adjustment According to Market Value Changes of positions if needed at market value SEITE 17
Join the Partnership. Facilitation: Global Risk Management A/S, Middelfart, Denmark www.global-riskmanagement.com Expertise & Concept: ALBR3CHT Supply Concepts GmbH Düsseldorf, Germany www.supply-concepts.comPARTNER SEITE 18