Variance works closely with the finance teams of our clients with the objective of providing an exhaustive and independent advice on commodity risk management.
Metals, Gas, Oil, Biodiesel, Power, or Agricultural Commodities. Companies operating with this type of materials turn to Variance for specialized advice on commodity price and energy risk hedges using a systematic 3 step approach, which includes:
Risk Analysis
- Modeling the client’s financial risk profile and assessing the severity of the client’s risk exposure under unfavorable market scenarios
- Formalizing commodities risk management policies
- Studying the availability of financial derivatives linked to the specific commodity or any other sufficiently correlated alternatives. Evaluating the basis risk involved in a potential proxy hedge.
- Validating the accounting implications of the envisaged commodity hedge and its compliance with IFRS9 accounting standard principles before the trade
- Choosing suitable commodity hedging strategies.
Execution
- Reviewing the hedge documentation (ISDA contracts, Draft Confirmations…)
- Negotiating the applicable bank margins for hedge execution
- Assisting the client during the execution of the transaction with its financial counterparts and enhancing its negotiation power by bringing full transparency in pricing
Follow-up
- Valuation of all outstanding client hedging transactions.
- Hedge Accounting implementation, providing full IFRS9 reporting for auditors, including CVA-adjusted Valuations, Hedge Effectiveness Tests, Hedging Relationship Documentation and Hedge Inefficiency Calculation.
At Variance we have developed proprietary risk analysis tools and pricing models to provide transparency and live prices for hedging products.
Our financial expertise, market experience, and analytical capabilities, coupled with a deep understanding of the client’s context and objectives, makes us an ideal partner in the pursue of optimal financial risk management decisions.