To be sure, even before the onslaught of hurricanes, the natural gas market was already wrestling with the pressures from a flood of real demand from emerging economies and speculation by investors. "We, along with everyone else in the market, were experiencing tremendous volatility in natural gas prices," says David Rusate, GE's deputy treasurer of foreign exchange and commodities. "And [given] that increased volatility, we wanted to put more rigor around our risk management approach."

When GE decided to pump up its FRM technology, Rusate and his team, which included Maryann Vando, manager of commodity risk, and Jim Leddy, senior manager of technical accounting, first looked at the online tools used by GE's banking counterparts, but none met GE's requirements. So, Rusate and Vando went up to GE's global research and development center in Schenectady, N.Y., and outlined the mission: GE's primary objective was risk avoidance. "They're rocket scientists up there, and they developed this arithmetic simulator and were able to map out all the different types of scenarios and then plug in the tools that we would use," says Rusate.

To hedge its exposure, GE employs a portfolio approach, relying on SWAPs, call options and limit orders. It also uses OCO ("one cancels the other") limit orders: If natural gas is trading at $8 and GE has a purchase limit order at $8.25, it can also leave an OCO for $7.75. But "if the market goes to $8.25 first," says Rusate, "you're out of luck."

With the Web-based simulator, business unit managers can now test scenarios on their own without having to call on Vando. This allows Vando to concentrate on tweaking the company's hedging strategies for natural gas and the other 30 commodities she manages.

Still, no project is ever a slam-dunk. There was a measure of "selling" the value of the simulator since there was a cost involved in building it and getting it up and running. But the benefits of having better data available to the business units were clear, given that a 5% movement in natural gas prices costs GE roughly $10 million.

The simulator is accessed through GE's intranet. "[The businesses] can know that if they're hedging their exposure with 50% options and 50% forward contracts, here is what my option cost is going to be [and] here is how much deflation I [will] achieve if prices drop 10% or 20% or 30%," says Rusate.

It can be adapted to hedge other commodities–like copper, which has jumped to $4, from 72 cents, in three years. "We still need historical data on pricing for metals and the other commodities," says Vando, but the key algorithms are the same. More importantly, the simulator has reaffirmed GE's portfolio approach. "Imagine if you were running a business and your cycle for hedging natural gas hit when prices were at $15 and you hedged with a forward contract at $15 and now prices are at $4?" says Rusate. "You'd be at a severe competitive disadvantage."

SILVER AWARD WINNER

Honeywell International Inc.

There are always two aspects to risk–the tangible and the intangible. In 2003, Honeywell implemented SunGard AvantGard's global treasury workstation and FXall's foreign currency trading/settlement Web application. The applications comprised Honeywell's FX hedging solution. One problem: Honeywell's FX trader had to manually take the e-mails and spreadsheets from the 200-plus units, data-mine them into one net trade requirement per currency pair and then execute the hedge. Given the volume of data, reworking mistakes became commonplace.

A team headed up by Santiago Gil, Honeywell's director of corporate finance, and Joseph Nametko, the information technology manager of corporate financial systems, met to solve the problem and decided to keep the integration in-house. "We literally live and breathe this application," says Nametko.

The solution turned out to be an intranet-based foreign exchange Web tool, which sits on Honeywell's intranet, and a cross-application integration module code named FEFCI (foreign exchange forward contract interface). Business units input their FX exposures into the FX Web tool. FEFCI crunches them into trade requirements, formats them and uploads the data via the Net into FXall, where the trades are executed. Trade details are sent to the workstation, which sends them to FEFCI. FEFCI creates the internal trades and sends the details to the workstation, which sends out confirmations.

The savings in time and effort of the solution is clear: information is entered once, cutting down on errors. But coming up with a number for the savings is tougher. "The [real] savings come from: 1) better controls; and 2) letting people sleep better at night," says Gil. In other words, it's in the intangibles.

BRONZE AWARD WINNER

Hewlett-Packard Co.

For many years, a top priority of Hewlett-Packard Co.'s share repurchase program has been to offset dilution from employee share programs. By mid-2005, HP had gone five years without significant dilution from employee stock option exercises. Then in 2005, HP's shares began to rise, unleashing a flood of employee stock option exercises.

HP's treasury had forecast the consequences of rising shares and had developed a tool to predict how many would be exercised at different prices. If the stock kept rising, "the number of shares [HP] would need to buy back to offset dilution would be much higher," says Kenneth J. Frier, vice president of corporate treasury.

Treasury proposed that HP come up with a way to offset future dilution. HP needed to: 1) set a price cap per share to buy back stock; 2) structure the transaction so that it would have an impact on shares outstanding over time rather than all up-front; 3) have efficient pricing; and 4) offer downside protection.

HP considered several solutions, including entering into a set of collar transactions, where HP would prepay a series of out-of-the-money call options and sell out-of-the-money puts. The prepaid collar was the most complicated solution, but the more HP studied it, the better they liked the fit. It met all of the objectives. "It set a cap on our purchase price. It provided downside protection," says Tony Altobelli, the corporate finance manager. It spread out purchases and it was efficiently priced.

The project, begun in August 2005, was done by November. The hard part was determining how to apply existing accounting and legal guidelines to the transaction. "The accounting and legal guidelines didn't quite address" the new structure, says Altobelli. While Frier won't say how much the prepaid collar has saved HP, the collar went live in December 2005. Shares have since risen 30%.