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Financial & Regulatory Risk Managment System (FARRMS) Enterprise Architecture
So why would a company enter into a hedge that becomes a cash burden? Remember entering into a hedge position is a way to lock in potential future exposure to a commodities volatility, however just because you think prices are going up in the future does not necessarily mean that they will. Should prices slide and not rise, for example the mentioned Utility “buy position” becomes a loss margin call cash exposure. The position now has a loss associated with it.
The Basics of Energy & Commodity Risk Management ETRM-CTRM- Hedging Strategies – Blog 1 of 2
Companies that are exposed to commodity price volatilities often find themselves looking for ways to mitigate the price volatility in order to better predict or mitigate their commodity price exposure into the future. This is easier said than done, especially in today’s wildly volatile marketplace. Nonetheless, companies need to find ways to manage this exposure for many competitive reasons. Many look to consultants that specialize in energy trading and risk management –ETRM or commodity trading and risk management –CTRM to provide guidance in establishing a basic risk management (margin limits etc.) and hedging strategy. Once policy and procedures are defined companies can begin to execute the hedging strategy.