Finance Tools
Commodity Hedging Cost vs Benefit Calculator
Estimate the expected cost vs benefit of hedging a commodity price risk using hedge ratio, price scenarios, and a hedging premium or fee.
Estimate the cost vs benefit of hedging a commodity price change using a hedge ratio and a simplified hedging cost model.
Total units purchased per year.
Current commodity purchase price.
Use negative values for expected declines.
Percent of exposure you hedge (coverage).
Simple proxy for option premium / hedge carry cost.
Baseline & scenario
Baseline spend: $1,200,000
Scenario price: $2.69
Unhedged spend: $1,344,000 (+$144,000)
Hedged outcome
Hedge cost: $12,600
Hedged spend: $1,255,800 (+$55,800)
Net impact (hedged − unhedged)
Difference: -$88,200
Negative means hedging is cheaper than unhedged under this scenario (saves money). Positive means it costs more.
Tip: This is a simplified hedge model. It’s useful for quick decision-making, not for pricing derivatives.
How it works
- Unhedged spend uses the scenario price for all units.
- Hedged portion is assumed locked at current price (simplified).
- Hedge cost is modeled as a premium (% of hedged notional) or fixed fee.
FAQ
Is this accurate for options/futures pricing?
No—this is a simplified planning model. It helps compare “roughly worth it” scenarios.
What if prices fall?
Hedging can reduce downside benefit. Test negative price-change scenarios to see opportunity cost.
How to use this commodity hedging cost vs benefit calculator
- Enter annual commodity usage (units) and current commodity price per unit.
- Enter expected price change (%) without hedging and hedge coverage ratio (%).
- Enter hedging cost as a premium (%) or fixed fee ($).
- Review unhedged vs hedged spend and the expected net benefit of hedging.
Example
You buy 500,000 units/year at $2.40/unit. You fear prices may rise 12%. You hedge 70% of exposure. Hedging costs 1.5% of hedged notional.
- Unhedged extra cost = 500,000 × 2.40 × 12% = 144,000
- Hedged exposure = 70% of extra cost ≈ 100,800 avoided
- Hedging premium ≈ (500,000 × 2.40 × 70%) × 1.5% = 12,600
- Net benefit ≈ avoided cost − premium
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