As a global company, Eastman Chemical's earnings can be impacted significantly by swings in interest and foreign exchange rates, as well as in the prices of commodities, especially natural gas and propane. To mitigate that volatility, the $5 billion manufacturer of chemicals and plastics projects its propane needs, for example, over the coming year and purchases the commodity using forward contracts to lock in a price over that period. That allows executives figuring out their budgets for the next year to more effectively price products and analyze profitability.
"By taking some of the volatility out of the price of raw materials, we're able to provide customers with some pricing certainty so they can better manage their businesses," says Mary Hall, treasurer and vice president of Eastman Chemical. "Without derivatives, we wouldn't be able to do that."
Concerns are mounting, however, that new regulations may make over-the-counter (OTC) derivatives, which multinationals employ to hedge a wide range of risks, too costly for them to use effectively.
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