Commodity Trading Firms face several overlapping categories of risk. They hedge changes of flat price as basis risk which is considered as the risk of change in the differential between the price of physical commodity and its hedging instrument. The firms manage this risk in financial markets. In this regards, they also take on spread risk, which arises out of timing mismatch between a commodity and a hedging instrument.
The liquidity risks, including the hedging liquidity, market liquidity and funding liquidity are another source of major risks in commodity trading. The firms manage them through internal and external financial tools.
Operational risks are a variety of risks resulting from the failure of some part of operational process, rather than from variations in prices or quantities. This risk can be managed through a combination of approaches, including insurance, IT and health and safety audits.
Other risks, including political, legal, contract performance and currency risk, should also be considered and taken care of during a successful trading flow.
The firms also use diversification by trading in multiple markets and integration by using assets across the value chain to reduce all of the above mentioned risks.
The liquidity risks, including the hedging liquidity, market liquidity and funding liquidity are another source of major risks in commodity trading. The firms manage them through internal and external financial tools.
Operational risks are a variety of risks resulting from the failure of some part of operational process, rather than from variations in prices or quantities. This risk can be managed through a combination of approaches, including insurance, IT and health and safety audits.
Other risks, including political, legal, contract performance and currency risk, should also be considered and taken care of during a successful trading flow.
The firms also use diversification by trading in multiple markets and integration by using assets across the value chain to reduce all of the above mentioned risks.
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