How to use historical volatility to estimate cashflows

How to use historical volatility to estimate cashflows

Many companies are buying commodities worldwide. We are living in so called VUCA world, a volatile, uncertain, complex and ambiguous environment, which makes predictions less reliable than ever before. We can see how fast supply chains can be affected by a disease and resources will increase in price. Wouldn’t it be nice to know your commodity exposure? Wouldn’t your management board sleep better knowing that you as an ahead looking treasurer have hedged the cashflow at risk?

Here is an example:

Commodity Exposure in Coffee

Suppose you have to buy, during 2021, an annual volume of 10,000MT Arabica coffee. Your calculated cash flow based upon current market prices (prices taken 24th Jan 2020) would be around EUR 24.1 million for delivery in 2021.

What is the risk?

If you do not hedge this “floating priced” position, your cashflow@risk (=CfaR) for 2021 can be presented as the potential cashflow difference between:

  • Sourcing volume x (current market prices versus simulated market prices)
  • We calculated the current CfaR at EUR 13.7 million
  • Enough reason to hedge?

In case you would like to know more about the commodity solution, please contact us.

Close Menu