Commodity Hedging Policy: What It Should Cover | Mobius

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A commodity hedging policy is the governing document that defines how a company manages commodity price risk — what it hedges, why, with which instruments, within what limits, and who is accountable. A good policy turns hedging from ad-hoc reaction into disciplined, board-approved process.

When prices move against an unhedged business, the question boards ask is not "what happened" but "what was our policy." A written commodity hedging policy answers that in advance. It aligns the treasury or risk desk with the board's risk appetite, keeps hedging from drifting into speculation, and gives lenders and auditors confidence that exposure is managed on purpose.

What is a commodity hedging policy?

It is the framework that governs a company's hedging program end to end — the objectives, the exposures in scope, the approved instruments, the limits, the roles, and the reporting. It is approved at the board or risk-committee level and reviewed on a set cadence, so decisions made under pressure follow rules set in calm.

Why do you need one?

A policy delivers three things: consistency, so hedging does not depend on who is at the desk; governance, so the board's risk appetite is actually enforced; and credibility, so lenders, auditors, and investors can see that price risk is controlled. Just as importantly, it draws a bright line between hedging and speculation.

What should a commodity hedging policy cover?

A complete policy defines the elements below. Vague or missing pieces are where programs get into trouble.

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Who owns the policy?

The board or a risk committee approves it and owns the risk appetite; the treasury or risk function executes within the mandate; and internal controls or audit verify adherence. Clear segregation of duties — separating those who transact from those who confirm and report — is essential.

Common pitfalls

The failures are predictable: objectives so vague they permit anything, no hard limits, a program that quietly becomes a profit center, valuation and hedge accounting treated as an afterthought, and a policy that is written once and never reviewed as the business changes.

How Mobius Risk Group helps

Mobius drafts and reviews commodity hedging policies, sets practical risk limits using measures like Value at Risk, and provides independent oversight of the program — as an unconflicted advisor with no stake in the trades. We help align the desk to the boardroom and keep it there.

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Frequently Asked Questions

Who approves a commodity hedging policy?

Typically the board or a risk committee, which owns the risk appetite the policy enforces.

How often should the policy be reviewed?

At least annually, and whenever the business, its exposures, or market conditions change materially.

How is hedging different from speculation?

Hedging reduces an existing exposure; speculation takes on new risk for profit. A good policy explicitly prohibits the latter.