Price, FX and Capital: Three Exposures, One Table

The previous articles handled commodity price, foreign exchange and treasury yield one at a time. Put them side by side and one long-neglected fact appears: these three exposures are not three separate things — they compete for the same resources.

A hedge consumes not only the price exposure's limit but also credit lines, margin and funding cost. An FX lock consumes not only the FX exposure's limit but capital as well. When the three sit in three departments under three separate systems, each department looks perfectly reasonable on its own — and together they may already have exhausted the company's resources.

This article closes the series: how to put the three exposures on one table.

Why separate management necessarily breaks

Start with a set of structural contradictions we meet in real companies.

Contradiction 1: the same limit is contested by three parties. Suppose the company's total hedging limit is RMB 1 billion. Commodity hedging uses RMB 600 million; FX hedging applies for another RMB 600 million. Each department is inside its own limit, yet together they are RMB 1.2 billion. Only putting the limit into one pool exposes this.

Contradiction 2: costs are calculated in fragments. The commodity team sees "premium is 0.4% of cost"; finance sees "the interest cost of margin is rising"; nobody puts the two together. The result: the hedging team believes it is saving money, finance believes it is spending money, both are right, and the whole is getting worse.

Contradiction 3: timing conflict. This is the most dangerous one. Commodity price and FX can turn against you at the same time — the USD depreciating while the commodity price falls. Three pressures then arrive together: an FX loss, an inventory write-down and a margin call.

If those three risks sit in three departments with three contingency plans, they will all start on the same morning, and each department will assume "the other two will handle it." That is single-point failure in its classic form.

Contradiction 4: the assessment systems fight each other. The most common pattern: the commodity team is assessed on gross margin, the FX team on FX gains and losses, finance on funding cost. Three assessment systems produce three different optimal strategies, and the company-wide result aggregated from them may not match anybody's assessment score.

A unified exposure ledger: one table recording three things

Fixing these four contradictions does not require three systems. It requires one table.

The core of this table is three dimensions, and every exposure has to land in it:

1. Net position direction and amount — not the direction of a single deal, the net direction of the company. This column is the foundation of the whole system: if the net direction cannot be computed, the other two columns mean nothing.
2. Certainty of the exposure and its maturity date — "certain" and "uncertain" exposures need different instruments and different ratios, and this column decides which instrument is used.
3. The matching hedge instrument, ratio and cost — record "how much limit was used, how much capital was tied up, what it cost" on the same line, and the three can never be separated again.

The table has a second benefit: it is also an early-warning system. When any one of the three dimensions breaches its limit, you see it immediately, because they sit on the same row.

A unified authority matrix: one pool, one table

The limit has to be one pool, not three separate quotas.

In practice: set one total exposure limit, with internal allocation rules for the commodity, FX and capital dimensions, but no hard carve-up — allow one dimension to borrow from another when it is necessary, with a higher level of authorisation and a record left behind.

The benefits are straightforward:

• you will not be forced to abandon a necessary commodity hedge because "the FX limit is used up";
• you will not exceed the total limit because each department applies separately;
• borrowing is recorded, so afterwards you can see how the resources were actually allocated.

Unified P&L attribution: every operation must answer one question

This is the last step in making the three exposures genuinely work together, and the part that shows management quality most clearly.

The standard is this: every hedge or FX operation must afterwards be able to answer — which exposure did it affect, and what did it cost?

Concretely, a long commodity futures position should be able to answer:

• which contract's price exposure, and which part of it, does it cover?
• what is its cost — premium, commission, or the funding cost of the margin?
• if the operation were not done, what exposure would the company be carrying?

The same FX operation must answer: what proportion of the net USD exposure it covers, which certainty tier it sits on, and how wide the rate range it locked.

With this attribution in place, management can answer the question that actually matters: "what was the net contribution of the operations we ran last year?" — rather than, as many companies can only do, seeing commodity +RMB 2 million, FX −RMB 1.5 million and funding cost RMB 1.8 million, and then judging by feel which one was "more worth doing".

Three decisions, three different answers

Reading this table may be uncomfortable, because it turns "should we do this hedge" from a technical question into a resource allocation question. But that is precisely why it exists: so that every decision faces the real constraints, instead of each one optimising inside its own small field.

How to start: four steps

1. First compute the three exposures separately (4–8 weeks). Most companies already have half the groundwork — many calculate the price exposure reasonably well, the FX exposure roughly, and the funding exposure barely at all. Start from the weakest one.
2. Merge them into a single ledger (2–4 weeks). Combine three tables into one. Technically this is not hard; the difficulty is a consistent definition — especially for the "amount" column, because different departments often define "exposure amount" differently.
3. Run one combined stress test across all three exposures (1–2 weeks). This is the step that persuades management most: assume the commodity falls 10%, the RMB appreciates 3% and a margin call of RMB 20 million arrives at the same time — then check whether all three happen, and whether there is enough cash. Many companies have run single-risk stress tests and almost none have run combined ones.
4. Move authority and assessment onto one shared basis (3–6 months). Pool the limits, and unify the assessment on a risk-adjusted contribution basis. This is organisational change: usually the slowest step, and the one that cannot be skipped.

A self-check you can run today

1. Your commodity hedging limit, your FX hedging limit and your funding usage — added together, do these three numbers exceed what the company can carry?
2. Over the past 12 months, what was the net contribution to profit of commodity hedging, FX locking and treasury yield taken together?
3. Has there ever been a case where the commodity and the FX turned against you at the same time? Who handled it? Was there enough cash?

The third question is the most valuable check. If the answer is "it has never happened", that usually means the scenario has not arrived yet — not that it cannot arrive. And when it does, it is the day all three departments collide.

Sources and notes

The three-exposure coordination framework, the unified ledger and the authority matrix design used here are RMC's standard method in building corporate commodity risk management systems and in annual advisory service. The stress test scenarios and example figures are de-identified constructions of typical situations and do not represent the actual operating data of any specific company. Each company can run the same method against its own business structure. Nothing in this article constitutes a recommendation or evaluation of any specific software or investment product.