Off the Paper Roller Coaster
Fixed-price swaps aren't solutions exclusive to paper producers; paper buyers can initiate these types of agreements to protect them from market pressures, as well.
There are no fees or premiums assessed in a financial swap, and only money—never actual paper—changes hands between the two parties. Swaps convert a floating price to a fixed price, guaranteeing stability. After a period of time determined at the agreement's negotiation (typically between one and 10 years), the swap expires.
Caps and floors: Caps allow businesses know the maximum cost they'll pay for a product if the price rises, but it still allows them to benefit if there is a downward price movement. Floors allow businesses to protect themselves against drops in product prices, but also allows them to benefit from price increases.
Collars: Collars combine a price cap with a price floor, which reduces the cost of protection by establishing a range within which prices will fluctuate. For example, a price floor provides full protection against falling prices, while affording unlimited benefits should prices rise. Price collars are a price- effective alternative to a straight cap or floor.
The greatest benefit of these price management strategies is that companies can set firm budgets for the year, knowing that their expenditures will remain constant. They ensure stability in a market that can be anything but stable. It's important to note that these financial risk strategies work in tandem with, but independently from, paper supply chains. Publishers, for example, can retain their current suppliers and existing paper contracts while participating in these price-stablizing programs.
Risk management programs start with a contract. Reputable paper price risk counter-parties will review the details of the agreement with the participant. The pulp and paper industry relies on International Swap & Derivatives Association (ISDA) agreements, a standard contract used globally to manage multiple commodities, including interest rates, currency and oil. The ISDA governs the transaction, but precise transaction terms are negotiated separately and are formalized as addenda to the master agreement.