What hedge ratio has Bimbo Foods Bakeries Distribution established for its hedging relationships?
Bimbo_Foods_Bakeries_Distribution Franchise · 2025 FDDAnswer from 2025 FDD Document
risk
There is an economic relationship between the hedged items and the hedging instruments the terms of purchases of raw materials match the terms of the expected highly probable forecast transactions (i.e. notional amount and expected payment date). The Company has established a hedge ratio of 1:1 for the hedging relationships as the underlying risk of the purchases of raw materials are identical to the hedged risk components.
In accordance with the Company's risk management policies, it enters into wheat, natural gas, and other commodity futures contracts to minimize the risk of variation in international prices of such commodities.
Wheat, the main commodity used by the Company, together with natural gas, are some of the commodities hedged. The transactions are carried out in well-known commodity markets and through their formal documentation, are designated as cash flow hedges of forecasted transactions.
Source: Item 14 — Other Accounts Payable and Accrued Liabilities (FDD pages 312–476)
What This Means (2025 FDD)
According to Bimbo Foods Bakeries Distribution's 2025 Franchise Disclosure Document, the company has established a hedge ratio of 1:1 for its hedging relationships. This applies to both commodity price risk management and foreign currency hedges. The company uses hedging to minimize the risk of price variations in commodities like wheat and natural gas, as well as foreign currency fluctuations related to raw materials purchases.
The 1:1 hedge ratio indicates that for every unit of the hedged item (e.g., a specific quantity of wheat or a certain amount of foreign currency), Bimbo Foods Bakeries Distribution uses one unit of the hedging instrument (e.g., a futures contract or a forward contract). This approach is based on the alignment of the terms between the purchases of raw materials and the hedging instruments, ensuring that the notional amount and expected payment date match.
For a prospective franchisee, this information demonstrates that Bimbo Foods Bakeries Distribution actively manages its exposure to commodity price and foreign currency risks. By using a 1:1 hedge ratio, the company aims to offset potential losses from price fluctuations, which could help stabilize costs and maintain consistent pricing for its products. This risk management strategy can contribute to the financial stability of the company and, by extension, its franchisees.
Bimbo Foods Bakeries Distribution performs prospective and retrospective effectiveness tests on its hedging instruments. These tests ensure that the instruments effectively mitigate the variability of cash flows resulting from commodity price fluctuations. This ongoing evaluation helps the company maintain the efficacy of its hedging strategies and adjust them as needed to address changing market conditions.