Commodity exchanges: A price risk management tool

Commodity prices are more volatile than currency exchange rates and interest rates. Hence, a priori, commodity price risk represents a more important source of risk to entities in the eco system of supply chain, be it intermediate or final processors or consumers. Commodity being the main source of input, it is quite evident that corporates exhibit large exposures with regard to several commodity price movements. High volatility, Basis Risk and commodity price risk are however the main guiding criteria weather a company can sustain its operations for a longer time or will tumble down soon. This paper presents a comprehensive analysis of how futures and spot exchanges can pe used a tool by both producers of the commodity and consumers of the commodity, for price risk management with special emphasis on some volatile and non-volatile commodity. Multiple scenarios are discussed throughout the paper to make one understand that how Futures platform can be used to minimize the price risk.

This paper is completely for education purpose only, and the views and opinions expressed in this paper may or may not match the views of the reader. It does not constitute a personal recommendation or consider the particular investment objectives, financial situations, or other needs of the reader. This document is not intended to be and must not be taken as the basis for any investment decision. It should be noted that the information contained herein is from publicly available data or other sources believed to be reliable.