01Measuring exposure
Exposure is the amount of a commodity whose price change will reach your earnings. It comes from purchases not yet priced, inventory on hand and sales contracts with fixed prices. Many companies measure it department by department. Vadar Alpha nets it into one position per commodity, so a fixed price sale and an open purchase that offset each other are not hedged twice.
02Sizing hedges
A hedge ratio set at budget time drifts as volumes change. Vadar Alpha sizes each hedge to the current net position and prices it against the forward curve, inside the limits your board approves.
03Value at Risk and earnings at risk
Value at Risk estimates how much a position could lose over a period at a chosen level of confidence. Earnings at risk applies the same idea to the income statement. Vadar Alpha reports both, before and after hedging, so you can see what each hedge buys.
04Proving protection
Hedges are often judged by whether they made money, which misses the point. A hedge that loses money while the physical purchase gets cheaper did its job. Vadar Alpha records each hedge with the exposure it covers and reports the combined result, in dollars.