Monday January 5, 2009
Commodity hedging a growth business for StanChart
By SHANNEN WONG
COMMODITY hedging would ensure certainty in an asset class that is the most volatile, said Standard Chartered Bank managing director and head of financial markets Sandeep Bahl.
StanChart, which started to offer commodity hedging services two years ago, saw the number of its customers in the commodity sector double from 2007 to last October.
“We recorded a 100% increase in the number of transactions in commodity hedging globally and expect to see the same growth this year,” he told StarBiz.
More than 30% of the bank’s new clients are first-time users.
Commodity hedging had become more popular as it allowed companies to concentrate on their core production rather than worrying about the risk being mitigated by the financial instruments, Sandeep said.
“Our first step is to work with clients on price risk management, which involves identifying and quantifying the risks that a business is exposed to,” he explained.
After that, StanChart would conduct a “commodity price sensitivity analysis” to identify the important risks that were relevant to a business before making an alignment on how and what to hedge based on its hedging objectives, he added.
Sandeep said the analysis could be done by standardising the commodity prices and seeing of how cashflow would move to changes in the price.
He explained that the three ways to hedge – through supply, futures or over-the-counter contracts – had their pros and cons that needed to be considered to match the company’s hedging objectives.
“It is critical to work out a risk management strategy that is in line with the company’s objectives to help companies mitigate their risks in the most efficient manner,” he added.
Complementing its traditional hedging products, StanChart provides hedging services for commodities such as precious metals, base metals, energy and agricultural products.
“The value of hedging is to introduce certainty and reduce volatility,” Sandeep said.
“We hope to be able to help companies look at the whole picture and mitigate the risks with a more complete range of hedging products as part of their risk investment tools,” he said.