Many firms have an array of available approaches for reducing finan-cial losses caused by commodity price changes. This chapter provides guidance for more accurately measuring the potential financial effects of commodity price risk mitigation approach selection. Based upon two prominent methodologies, namely Total Cost of Ownership (TCO) and Real Options Approach (ROA), this chapter illustrates how commodity price risk mitigation strategies can be analyzed with respect to their effect on costs and performance. A practical example is provided to illustrate how TCO and ROA can provide useful insight in measuring the costs and benefits related to mitigating the effects of commodity price volatility.
The 'True' Cost of Mitigating Commodity Price Volatility: Insights from Total Cost of Ownership and Real Options Approach
Gaudenzi, B.;
2020-01-01
Abstract
Many firms have an array of available approaches for reducing finan-cial losses caused by commodity price changes. This chapter provides guidance for more accurately measuring the potential financial effects of commodity price risk mitigation approach selection. Based upon two prominent methodologies, namely Total Cost of Ownership (TCO) and Real Options Approach (ROA), this chapter illustrates how commodity price risk mitigation strategies can be analyzed with respect to their effect on costs and performance. A practical example is provided to illustrate how TCO and ROA can provide useful insight in measuring the costs and benefits related to mitigating the effects of commodity price volatility.
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