Price risk management with financial hedging

We know that the uncertainty in the price of your commodities is one of your main concerns and that is why we offer you tools to manage price risk variation through financial hedging

Do you know what your margin will be?

We are aware of the issues with buying and selling a product when you don't know the price at the time the physical transaction is made. The price depends on the volatility of domestic and international markets. 

To help you manage this risk, Repsol offers you tools that allow you to anticipate the margin of your operations beforehand.

A tile company needs physical gas for its production process, so in June 2022 it agrees to purchase 7,500 MWh of natural gas, whose price is benchmarked to TTF ICIS Heren Day Ahead with a pricing period in September 2022.

The aim of the company is to guarantee a maximum price of 210.00 EUR for each MWh used in its production process, an equivalent price at which it will sell the products it manufactures. However, without knowing at what average the price of gas purchased in September will be, it does not know with certainty what the final price of gas will be.

To try to limit the uncertainty, it decides to tap into the derivatives market, where it purchases a swap of 7,500 MWh from TTF ICIS Heren Day Ahead with price in September 2022, whose fixed price is established at 207.00 EUR/MWh, 3.00 EUR/MWh less than the target price, so 3.00/MWh would be the tile company's profit.

The swap is liquidated as the difference between the floating price of the swap (variable part), which in this case is the September average, and the purchase price, which in this case is a fixed price of 207.00 EUR/MWh:

On the other hand, the total result of the operation, taking into account the physical part and the associated derivative, is the following:

The swap gives the chance to ensure a margin, regardless of what the price of gas will be in September 2022 as long as there are no incidents in the tile's production process.

Once September has passed, the price is formed as the average of each day's prices:

• The purchase of physical gas occurs at the month's average price, 190.59 EUR/MWh.
• The sale of the products resulting from the production process is established at an equivalent price of 210.00 EUR/MWh.
• Lastly, the swap liquidation at maturity would be the following:

Nevertheless, the economic result of the operation will be: 210.00 – 190.59 + (-16.41) = 3.00 EUR/MWh. So the margin is known and established beforehand, as a result of the derivative closing.

Despite the liquidation of the financial swap being negative, the price of the physical product offsets said liquidation and allows to ensure the established margin beforehand, if there are no incidents in the tile's production process, instead of being exposed to possible market variations, whether positive or negative.