We are in commodity business where our margin fluctuates a lot with the change in oil prices. Need help in coming up with the best way to calculate the market effect on our margin. In other words, how to differentiate the change in margin from prior month between market change and other factors. TIA!!
Sounds like you need a multi-factor regression model which would regress the change in margin (dependent variable) against the change in the market and other influential factors (independent variables). This would apply appropriate factor weights to each independent variable that would hopefully explain a large % of the change in margin. I remember this from the CFA exams but haven’t actually built one myself, so I’ll let those with actual experience take it from here or tell me I’m an idiot.
Ususally we have a lag of one month in buying and selling the product which helps us make more money when market goes up and lose money when market goes down. So regression doesn’t show a good corelation of margin with market.
I’m trying to build a model where we can calculate the market impact month over month. One way I see it is look at the change in cost per unit (curr month vs prior month)*volume prior month. But not sure if this really gives me the market impact.
Figure out how many volumes are sold
Use hedged price to determine hedged vol sold
use a price assumption for unhedged
toggle the price assumption by 10% to get a “sensititivity”
once you’ve decided how much you’re stress testing for, plug the sensitivity effect into the earnings.
^ How to determine hedged price?
Do you have a hedge book which shows hedge portfolio?