In the manufacturing industry, raw materials have always played an important role in planning a company's liquidity. People like to buy them when the so-called “commodities” are cheap, but can usually only store a certain amount of them until they are processed - whether for reasons of space or because the raw materials are perishable.


For continuous production, the supply chain must be secured and so that the buyer is not completely unprotected against price fluctuations, long-term contracts are negotiated with conditions that are as constant as possible. This is not possible for all goods and cannot always be maintained on a permanent basis. Force majeure such as pandemics, supply bottlenecks due to embargoes or natural disasters have shown how quickly optimised supply chains can be severely disrupted in a globalised economy.


In order to continue to exist, companies have to find new sources and accept prices that sometimes put a strain on their liquidity. If the search for replacement suppliers takes too long, it can even lead to a loss of sales because end customers drop out and look for other producers. In this respect, it makes sense to include the effects of commodity price fluctuations in liquidity planning.


Not only the typical storable raw materials such as metals, agricultural products and fuels, but also energy, auxiliary and operating materials such as gas, electricity and water in particular, and individual manufacturing components (e.g. microprocessors) have to be taken into account.


As different as the respective commodities are, due to their price fluctuations they form the underlying value of derivative financial instruments that are used to hedge volatility. These are very similar to hedging instruments in the foreign exchange area (forwards and swaps) and are supplemented by standardised forward contracts (futures).


Even when commodity purchasing departments in corporations use dedicated systems for sourcing raw materials, energy and other basic components to monitor the supply chain, the associated cash flows need to be considered in financial planning.


A treasury management system supports the corporate treasury manager in identifying commodity price risks and hedging them. The aim of the activities is to contain the volatility of the procurement prices by concluding counteracting financial instruments at low transaction costs.

Trinity TMS Functions at a Glance

  • Overview of cash-relevant commodity hedging contracts
  • Recording, administration of commodity derivatives (forwards, options, etc.)
  • Definition of commodities similar to foreign currencies
  • Consideration of exchange location, reference quantity and strike price
  • Extended documentation by attaching documents or link to DMS
  • Due date monitoring
  • Current hedge status by comparison with specified hedge ratio
  • Determination of the exposure
  • Separation of front/(middle)/back office, dual control principle
  • Settlement via defined standing instructions
  • Automatic account assignment and posting of cash flows


Maximum Transparency and Risk Reduction

  • Overview of company-wide price risks and hedges
  • Improved assessment of the impact of individual commodity price changes
  • Optimisation of the decision-making basis for active liquidity control
  • Differentiated planning and simulation
  • Flexible pivot analysis and evaluations


Revision Security

  • Clear mapping of all positions, cash flows and price hedges
  • Traceability at any time through audit trail and historization of prices
  • Individual authorisation profiles for users in the front/middle/back office
  • Dual control for important workflow steps
  • Automated workflows based on predefined rules


Time and Cost Savings

  • Improved liquidity planning through risk mitigation
  • Rapid identification of losses/intermediate financing to be avoided
  • Optimisation of the hedging strategy by avoiding over-hedging

Best Practice

Trinity TMS helps to take cash flows from commodity hedging contracts into account in a company’s liquidity planning. The system allows certain scenarios to be run and the impact of price fluctuations on the company's overall liquidity to be better quantified through plan comparison. From the exposure overview, the hedging needs for commodities can be quickly determined and the appropriate instrument selected.


Provided that the companies do not buy the respective goods by cash, most companies limit themselves to forward exchange transactions when hedging against foreign currency fluctuations, as these are inexpensive, clearly calculable and easy to understand. In addition to forwards, options can also be used.


All cash flows from the derivative financial instruments are immediately reflected in the liquidity planning and cash management without being re-recorded.


For more in-depth analyses, valuations and simulations to optimise the commodity portfolio, we recommend the solution of our partner KYOS


Commodity-Hedging, Commodities, Exposure, Derivatives, Price-Risk, Price-Hedging, Risk-Management, Volatility, Hedge Ratio, Agri-Business, Metals, Energy, Fuels


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