Insuring against price fluctuation
Discussion
Hello all,
Does anyone have any experience of or know where I should be looking to insure against a commodity price fluctuating?
I am involved in a project that is finding it difficult to close finance due to the potential of a price drop.
The project has a buyer (a very large multinational) for all the product and will sign a multi year (10-15 year) agreement to buy all production.
The product does fluctuate in price 10-15% at times but over the last 15 years has overall held its price with yearly increases in the region of 3-5%.
The product is highly sought after.
The issue the project is running into is the customer can not guarantee the price they will pay.
Now I know you can insure anything but don't know where to look or who to talk to about doing so....
For more background the project would have a turnover in the millions and a fluctuation of 10% in price would result in a cost to the company of 5-10 million.
I hope the above makes sense, any help would be appreciated.
Does anyone have any experience of or know where I should be looking to insure against a commodity price fluctuating?
I am involved in a project that is finding it difficult to close finance due to the potential of a price drop.
The project has a buyer (a very large multinational) for all the product and will sign a multi year (10-15 year) agreement to buy all production.
The product does fluctuate in price 10-15% at times but over the last 15 years has overall held its price with yearly increases in the region of 3-5%.
The product is highly sought after.
The issue the project is running into is the customer can not guarantee the price they will pay.
Now I know you can insure anything but don't know where to look or who to talk to about doing so....
For more background the project would have a turnover in the millions and a fluctuation of 10% in price would result in a cost to the company of 5-10 million.
I hope the above makes sense, any help would be appreciated.
its not something I've come across. As its essentially asking the insurance company to insure you against normal risks associated with doing business.
However, in recent years I've seen some interesting products launched. i.e Lockton's have a sport division where sports pubs and bars can insure against loss of profits if England don't make it through to a later stage in a major tournament,
with a bit more detail I could potentially find something for you
are the price changes due to FX?
However, in recent years I've seen some interesting products launched. i.e Lockton's have a sport division where sports pubs and bars can insure against loss of profits if England don't make it through to a later stage in a major tournament,
with a bit more detail I could potentially find something for you
are the price changes due to FX?
Its confusing how you are using commodity and product interchangably.
The project and customer descriptions are also confusing.
"The project has a buyer (a very large multinational) for all the product and will sign a multi year (10-15 year) agreement to buy all production."
"The issue the project is running into is the customer can not guarantee the price they will pay."
It sounds like the final buyer intends to sign a 10-15 year deal to buy a particular product whose production in turn relies on a commodity the price of which fluctuates.
The problem as I understand it is that the producer of the product cannot guarantee a price as they in turn do not know how much they will pay for the main commodity.
Perhas you could clarify.
However, having typed that I think the poster above saying Futures is what you need is correct. Its like insurance but recognised as a financial instrument and can be traded.
The project and customer descriptions are also confusing.
"The project has a buyer (a very large multinational) for all the product and will sign a multi year (10-15 year) agreement to buy all production."
"The issue the project is running into is the customer can not guarantee the price they will pay."
It sounds like the final buyer intends to sign a 10-15 year deal to buy a particular product whose production in turn relies on a commodity the price of which fluctuates.
The problem as I understand it is that the producer of the product cannot guarantee a price as they in turn do not know how much they will pay for the main commodity.
Perhas you could clarify.
However, having typed that I think the poster above saying Futures is what you need is correct. Its like insurance but recognised as a financial instrument and can be traded.
Speak to your bank - they have teams of people that provide hedging for all sorts of financial risk, including commodities. Depending on what the underlying is, there may be a direct hedge or you may be able to proxy the hedge off a similar product.
I don't think futures are suitable due to the margining requirements but banks routinely provide cash settled swaps based on the futures market.
I used to run the commodity trading desk for one of the big UK clearers (10 years ago now) so happy to chat over a PM if you want.
I don't think futures are suitable due to the margining requirements but banks routinely provide cash settled swaps based on the futures market.
I used to run the commodity trading desk for one of the big UK clearers (10 years ago now) so happy to chat over a PM if you want.
Gassing Station | Business | Top of Page | What's New | My Stuff