FEASIBILITY STUDY FOR A NEW HEDGE PROGRAM

Client: Recycled Metals company

 

Problem: A scrap metal processing company approached R^2 concerning the feasibility and implementation of a metals hedge program.

 

Solution: R^2 determined, through extensive analysis of the client’s sales history by product, that up to 75% of the company’s sales revenues could be hedged effectively. Rigorous statistics were provided to demonstrate that a combination of conventional and non-conventional hedge strategies could be used to build an effective hedge portfolio. The study determined appropriate hedge relationships and identified optimal hedge volumes based on regression analysis of historical prices and the observed inventory turnover rate at the client’s facility.

 

Conclusion: R^2 was able to determine that the slate of metal swaps available to the client would provide the foundation for an effective hedge program. Following the completion of the feasibility study, R^2 arranged introductions with potential hedge counterparties. We facilitated negotiations regarding likely hedge strategies and International Swaps and Derivatives Association (ISDA) documentation. Once the necessary ISDA documentation was in place, R^2 updated its hedge recommendations for the market conditions at that time. R^2 assisted the client with their initial hedges, helping to negotiate and acting as a witness to these transactions. Our involvement provided the client with third party documentation for the hedges and minimized the possibility of communication errors between the client and their banking counterparty. These hedges settled, on average, 12% above the market price.