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Hedging commodity exposures

by Neil Schofield

Languages: English

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About the trainer:

Neil Schofield is the principal of FMT Ltd., a UK-based company offering training services in the areas of treasury, derivatives, capital markets and risk management to financial institutions, central banks and corporations worldwide.

Neil was global head of Financial Markets training at Barclays Capital from 2001 to 2008. He teaches primarily on the rates business, covering all of the major asset classes and their respective derivative products from foreign exchange through to commodities.

Before joining Barclays Capital, he was a director at Chisholm-Roth Training for 4 years, where he was responsible for the provision of training services for a number of blue chip global investment banks. Clients included Citigroup, Deutsche Bank, Goldman Sachs, and JP Morgan Chase.

He started his training career at Chase Manhattan Bank, where he was originally employed as an internal auditor. Over a period of nine years, he conducted numerous internal and external training seminars including the Bank of England and the Federal Reserve System in the USA.

He has also held positions with Security Pacific Hoare Govett (now trading as Bank of America) and Lloyds TSB.

Neil holds a B.Sc. in Economics from Loughborough University and an MBA from Manchester Business School. He was elected as a Fellow of the IFS School of Finance (formerly the Chartered Institute of Bankers) in 1999.

Neil was appointed as a Visiting Fellow at the University of Reading ICMA center in April 2007.

He is the author of the book Commodity Derivatives: Markets and Applications and Trading the Fixed Income, Inflation and Credit Markets both published by Wiley.

He is currently writing two books a co-authored book entitled “Trading inflation: markets, instruments and strategies” and a sole-authored book “Equity derivatives: corporate and institutional and applications”.


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Hedging commodity exposures by Neil Schofield

About the training

#Options on spreads   #Basis risk   #Locational risk   #Min-max option solutions   #3-way solutions

This course is designed as a follow up to “an introduction to commodities” although it can be tailored to be a standalone course. The course starts with a review of the main sources of price risk faced by physical market participants. The simplest form of risk considered is that of directional exposure. That is, producers are exposed to falling prices, while consumers have the opposite problem. However, a common theme is that some participants are caught between the prices of two different markets. For example, an oil refiner will have an oil expense while receiving income based on their suite of refined products such as Jet Fuel. Other market risk problems include differences in quality, different delivery locations, timing differences, and currency mismatches. Having identified the main types of price risk the course then considers the different ways in which the exposures could be hedged. The focus is initially on ‘vanilla’ structures such as futures, swaps, and options, although this can be tailored according to client demand.

Learning outcomes

Sources of market risk

Identify the main sources of market risk faced by commodity market participant

Exchange-traded futures vs. Over-the-counter forwards

Describe how exchange-traded futures or over-the-counter forwards could be used to hedge directional price exposures.

Commodity swap

Explain the main features of a commodity swap and calculate the resultant cash flows

Commodity options

Define the main terms associated with commodity options

Zero premium option strategies

Outline a few zero premium option strategies used by market participants

Derivatives and non-directional risks

Describe how derivatives could be used to hedge non-directional risks such as price spreads, timing differences and currency considerations


  • Identifying commodity price risk

  • What is ‘spread’ risk and why is it key in commodity markets?

  • Using futures to hedge price risk

  • Problems using futures – what happens if there is no future that matches the nature of the underlying exposure

  • Problems using futures – what happens if there is no future that matches the nature of the underlying exposure

  • Using options to hedge price risk

  • Zero premium option structures (e.g. min-max solutions)

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