Key question
What is the optimal strategy to hedge commodity-linked costs that are priced in a foreign currency?
Commodity-linked costs create two interacting risk sources
Companies that source raw materials priced in a global benchmark (grain, metal, energy) face both commodity price risk and currency risk simultaneously. When the commodity is priced in a foreign currency, a price spike and an adverse FX move can hit at the same time — or they may partially offset. Example: a USD-reporting food manufacturer buying corn faces both corn price increases and EUR appreciation on its European operations.
Illustrative — two independent cost drivers
Hedging one risk in isolation can destroy the diversification benefit
When the two risks are nearly uncorrelated, they partially diversify each other. Hedging only the commodity OR only the FX exposure eliminates this benefit — leaving residual risk larger than expected. The efficient choice is: hedge both risks together, or hedge neither. The interactive demo below shows the EaR under each strategy.
Partial hedges reduce EaR less than expected — hedge both for full protection
Commodity costs
Operating costs
Hedging strategy
In the full version — any combination of instruments, tenors and ratios. Demo shows pre-set scenarios.
Individual earnings at risk
Each risk is assessed via Monte Carlo simulation (10,000 paths), EaR at 95% confidence over 1 year. The current corn–EUR correlation is nearly zero (−1%) — both risks are almost independent.
EaR · Corn price
$209mn
5% chance corn rises to $5.77/bu in 1 year
EaR · EUR/USD
$114mn
5% chance EUR strengthens to 1.37 in 1 year
Diversification
−$40mn
from −1% corn–EUR correlation
Correlation between risks
The current 1-year correlation between corn and EUR/USD is −1% — nearly zero. Unlike the oil–RUB case where a strong negative correlation provides a natural hedge, here the two risks are independent. The diversification benefit is small ($40mn) and is lost entirely when only one risk is hedged.
Current correlation
−1%
1Y rolling
Historical average
20%
since 2006
Diversification
$40mn
easily lost if partial hedge
Hedging strategy comparison
The interactive selector above controls which strategy is shown here. Partial hedges reduce EaR less than expected because they destroy the diversification. The efficient choice is hedge both — or hedge neither.
Strategy
Hedge both
EaR under this strategy
$5mn
−98% vs no hedge
Risk eliminated
98%
full protection
Demo is based on historical data. In the full version — current data, your commodity, your company's portfolio.