Commodity traders will continuously examine price movements in the markets to help with informed investment decisions. The observation of price alone is insufficient – traders must have ongoing tasks pertinent to commodity price risk management, in order to enhance returns and protect portfolios.
From equity traders to commodity traders, identifying risks associated with commodities is an important step. If unmanaged, risks can cause serious damage to performance. This blog, by Moneyplantfx, will give a base understanding of commodity price risks, their calculations, and their best practices for management.
Commodity price risks are the exposure to financial losses resulting from sudden and/or prolonged volatility in global or local commodity markets. Commodity price risks not only affect the producers and consumers of commodities, but also affect investors who trade commodities as financial instruments.
Price moves both up and down pose risks, thus price risk management is very important.
Commodity traders and portfolio managers depend upon financial modelling, analytics, and statistical techniques to evaluate risk.
Some common approaches include:
Individual investors, traders and large institutional investors (whether investors are individuals or organisations) use a number of Strategies for commodity price risk management. Some common approaches include:
There are many external factors that affect commodity markets. Main risks include:
Hedging is a strong method of protecting against commodity price risks. It is often thought that only institutions can hedge against these risks, but retail investors can use both futures and options on well-known exchanges, including:
National Stock Exchange (NSE)
Bombay Stock Exchange (BSE)
Examples of hedging methods:
Retail investors predominantly use futures and options, as they are a more accessible alternative.
Changes in commodity prices due to supply and demand, politics in the world, and climate can have a huge impact on the performance of various portfolios. Successful traders and investors have solid management strategies for commodity price risk in order to minimize losses.
At Moneyplantfx, we discuss whether there is a hedge through derivatives such as futures, options, and swaps that will protect your capital and provide gradual growth.
The online demat account makes it very easy for the investor to manage commodity exposures and execute their entire risk management strategy.
Whether you are a new investor or an experienced trader, it is important to understand the commodity price risk and how to mitigate the risk to build a strong and profitable portfolio.