Lesson 65 - Advanced Accounting Course

Lesson 65: Commodity Hedging in Large-Scale Enterprises

💡 What Is Commodity Hedging?

Commodity hedging is when companies protect themselves from price changes in raw materials (like oil, gas, wheat, metals, etc.) by using financial contracts.

🛡️ It’s like buying insurance against unpredictable price swings in the market!

🏢 Why Do Large Enterprises Hedge Commodities?

Large companies (airlines, food producers, manufacturers, etc.) depend on commodities. When prices go up or down suddenly, it can hurt profits.

✅ Hedging helps them stay stable, make better forecasts, and reduce risk.

🔁 How It Works (Simple Flow)

1. 📦 A company needs to buy a commodity (e.g., oil) regularly.
   
   

2. 💹 It worries the price will rise in 6 months.
   
   

3. 📑 It enters a futures contract today to lock in the price.
   
   

4. 🔒 Now it knows how much it will pay, even if market prices rise!
   
   

🛠️ Common Hedging Instruments

🛢️ Real-World Example: Airline Fuel Hedging

✈️ Airline A uses 1 million barrels of jet fuel per year.

• In January, oil is $80/barrel.
  
  

• It fears prices might rise.
  
  

• It buys a futures contract at $82/barrel for delivery in June.
  
  

✅ If oil hits $95 in June, Airline A still pays only $82, saving $13/barrel!
❌ If oil drops to $75, it still pays $82—but it chose stability over risk.

📊 Accounting Treatment of Commodity Hedges

Under IFRS 9 and US GAAP (ASC 815):

📉 Types of Risks Hedged 

📘 Summary Table 

🧠 Key Takeaways

• 🛡️ Commodity hedging helps companies avoid big losses from price shocks
  
  

• 📈 Tools like futures, forwards, options, and swaps are used
  
  

• 🧾 Accounting standards require careful valuation, documentation, and disclosure
  
  

• ✅ Hedging is not about making profit — it's about reducing uncertainty