Commodity Risk Management

By reducing or removing the volatility and uncertainty associated with fluctuations in commodity prices and currency movements, you can plan and budget with greater confidence.

The primary goal of commodity price risk management is to protect the economic value of a business from the negative impact of price fluctuations, at the lowest possible costs. It is an important concept for producers and consumers of commodities to understand and practice. Our Price Risk Management solutions can allow you to manage the risks associated with the uncertainty of fluctuating prices.

We can provide you with risk management solutions for the following commodities:

How does risk management work?
Our risk management solutions include:

Swaps
Commodity swaps offer growers and consumers a fixed or floating price per unit of measurement that covers the majority of their price risk, excluding basis risk. All swaps are cash settled at maturity and do not involve physical delivery of the underlying commodity to the Bank. Swaps can be used to lock in a fixed price per unit of measurement, or if you are currently receiving a fixed cashflow, you may want to swap this for a floating cashflow based on strategic reasoning.

Swaps may have multiple settlement dates or one settlement date known as ‘rate-set’ periods, where a settlement will be executed between your business and the Bank. These rate set dates may be quarterly, semi-annually, or customised to your needs and in the case of wheat price risk management, may reflect the payment dates within the AWB Basis Pool.

Swaps cannot be extended for an additional term and are cash settled at maturity, irrespective of whether they are "in the money" to the client (where the Bank owes you a cash payment) or "out of the money" to the client (where you owe the Bank a cash payment).

Options
Commodity options offer growers and consumers the right, but not the obligation to deal at a specified rate in the future. Options may be bought or sold, puts or calls, along with varieties of exotic option structures that may contain barriers or using multiple options to create customised pay-offs.

Call Options
A call option gives the buyer of the option the right but not the obligation to buy the underlying commodity at a future point in time (the expiry date) at a pre-defined price (the strike rate).

Upon expiry, the holder (purchaser) of the option will decide to exercise the option if the price is favourable, or allow the option to lapse worthless where it is optimal for the holder to deal in the cash/spot market. The seller of a call option receives a premium at the beginning of the transaction. The seller of the option has an obligation to effect settlement. It is only the option buyer who has the ‘option’ to settle. The premium is the cost to the buyer for this ‘option’ and is compensation to the seller who has an obligation to effect settlement.

Put Options
A put option gives the buyer of the option the right but not the obligation to sell the underlying commodity at a future point in time (the expiry date) at a pre-defined price (the strike rate). Upon expiry, the holder (purchaser) of the option will decide to exercise the option if the price is favourable, or allow the option to lapse worthless where it is optimal for the holder to deal in the cash/spot market. The seller of a put option receives a premium at the beginning of the transaction. The seller of the option has an obligation to effect settlement. It is only the option buyer who has the ‘option’ to settle. The premium is the cost to the buyer for this ‘option’ and is compensation to the seller who has an obligation to effect settlement.

Option Structures
By combining put and call options, a variety of structures can be built to suit your needs and reduce costs associated with the premium. Such structures are collars, put/call spreads and ratio options.

Exotic Options
In addition to the option structures available through the many combinations of put and call options, there are exotic options. Exotic options may use barriers that can 'knock in' or 'knock out' the option to alter the usual pay-off structure that is achieved through the use of vanilla puts and calls.

How can your business benefit?

By utilising Commodity Risk Management, you can:

Important information
As this information has been prepared without considering your objectives, financial situation or needs, you should, before acting on the information, consider its appropriateness to your circumstances.

All products mentioned on this web page are issued by the Commonwealth Bank of Australia, view our Financial Services Guide (PDF 56kb). View Product Disclosure Statements (PDSs) for Agricultural Swaps (PDF 128kb), Agricultural Collar (PDF 140kb) and Agricultural Options (PDF 140kb) and consider them before making any decision about these products. 

Other important information
Full terms are available on application. Bank and Government fees may apply.