Managing Risk and Creating Opportunity through Extreme Volatility

by Mark O’Toole, Vice President Commodities & Treasury Solutions, OpenLink

As the oil price starts to shoot up again following a period of sharp decline, and the value of the RMB falls again after China’s FX reserves posted their biggest monthly fall in history, investors have had plenty to keep them busy in recent weeks.

While this may not be great news for investors who have lost out as a result of these events, the falling RMB coupled with a spike in the oil price is, at least, proving more positive for companies with large commodity exposures. Usually, when input prices fall, profitability and margin increase as companies typically reduce consumer prices more slowly. Inevitably, however, market volatility goes up as well as down. Generating additional profits when the oil price plummeted may have lulled treasurers into a false sense of security, but a recent 20% increase reinforces the importance of having systems in place to hedge against larger price rises. Similarly, when the RMB finally does start to rise, prices of raw materials will again be on the upswing. It is difficult to predict when the RMB is likely to strengthen, but corporate treasurers need to act now to manage their risks.

While market volatility is something that treasurers expect, recent extreme price volatility has significantly increased the extent to which corporates can be caught out by price swings through inefficient commodity risk management. On the flipside, businesses that manage their commodity risk in a more centralised and sophisticated manner have an increased chance of gaining an edge over rivals that don’t.

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