Description
This is a presentation about various risk involved in commodity market.
Risk management in commodity desk - MeMber’s perspective
Commodity market
• Market where raw or primary products are exchanged • This is most complex market • Total daily turnover this market is 40000 crores • There is no trading of options but futures • Many large players like MF, Insurance, Banks, FII, NRI are not allowed to trade.
What is RISK?
Danger
Opportunity
Trading positions of member
Case I
• When member is trading in his own account
Case II
• When member is trading on the behalf of investor as intermediary.
Risk in Case I
Daily margin maintenance.
Money lent to investor to increase its trade volume for higher brokerage.
To abide by bye laws of exchange and regulator
Risk management in Case I
By keeping track of the open position he has at every movement to prevent himself from paying penalty. Avoid lending money to his customers.
Keep himself well informed of the changes in regulation.
Risk in Case II
Man-Made Risks: Natural Risks:
Natural disasters
Liquidity risk, Market risk, Operational risk, Political risks, Currency risk, Price risks, Interest risk,
Natural Risk
• Change in price due to weather, rainfall, temperature, Humidity or any natural disaster. Risk mitigation by:?Self insurance ?Crop insurance ?Index based insurance ?Weather derivatives (soon will be introduced in market)
Market risk
• Change in the price of commodity due to domestic or international change in demand and supply Price risk • Fluctuation in the prices of commodity due to appreciation/depreciation of currency • Change in the price of commodity due to change in interest rate by government or RBI.
Currency risk
Interest rate risk
Increase in employment rate Affect the prices on exchange Increase in spending power
Currency appreciates
Increase in demand but supply remain the same
Interest rate increases
Inflation increases i.e. price of commodity increases
Market risk Mitigation
Stress testing
Black Swan testing Well informed Fundamental analysis Technical analysis
Liquidity Risk
• Lack of marketability of an investment. Manifested by large bid and ask spread. • Money can remain blocked for long time. Risk can be mitigated by:?Avoid to invest in low volume traded commodity.
Operational risk
• Risks arising from the people, systems and processes. Risk can be mitigated by:?Adequate means of monitoring and measuring movement of commodity. For eg:
• Trade confirmation • Invoicing constitutes
Political Risk
• Political change that alters the expected outcome and value of a given economic action by changing the probability of achieving economic objectives. • For eg:- At the time of war or any political instability in the country affect the commodity prices indirectly. As this has greater impact on the import and export of the country. Moreover it will affect the capital inflow in the country from other country in form of FIIs.
Contd…
Political Risk
Impact the import/export and capital inflow
Affect the currency
Affect the Commodity
Risk mitigation
Customized analysis
In-depth subject matter reporting
Information that can enable an investor or firm to calibrate their risk appetite
Contingency planning, intellectual property safeguards, risk diversification and sound exit planning to guard against uncertainty. Transferring risk to other party like Insurer or Hedger
Commodity Risk Management Strategy
• Sustainability:- commodity risk is highly volatile and requires continuous monitoring and validation • Efficiency:- aims to ease the burden by leveraging common control monitors, processes, assessments and information. • Transparency:- greater transparency into key-risk indicators • Risk calculation. range of value at risk (VaR) models utilizing analyses such as Monte Carlo simulations
• Risk intelligence. Good information to ? Understand their commodity price and supply risk, ? Identify potential conditions/uncertainties Define key risk indicators to manage uncertainty ? Predict outcomes • Risk collaboration. provides integration and oversight with both accounting and compliance scrutiny to avoid issues with regulators • Risk modeling : models pointing failure or uncertainty and predicts what can happen to the business.
doc_262155908.pptx
This is a presentation about various risk involved in commodity market.
Risk management in commodity desk - MeMber’s perspective
Commodity market
• Market where raw or primary products are exchanged • This is most complex market • Total daily turnover this market is 40000 crores • There is no trading of options but futures • Many large players like MF, Insurance, Banks, FII, NRI are not allowed to trade.
What is RISK?
Danger
Opportunity
Trading positions of member
Case I
• When member is trading in his own account
Case II
• When member is trading on the behalf of investor as intermediary.
Risk in Case I
Daily margin maintenance.
Money lent to investor to increase its trade volume for higher brokerage.
To abide by bye laws of exchange and regulator
Risk management in Case I
By keeping track of the open position he has at every movement to prevent himself from paying penalty. Avoid lending money to his customers.
Keep himself well informed of the changes in regulation.
Risk in Case II
Man-Made Risks: Natural Risks:
Natural disasters
Liquidity risk, Market risk, Operational risk, Political risks, Currency risk, Price risks, Interest risk,
Natural Risk
• Change in price due to weather, rainfall, temperature, Humidity or any natural disaster. Risk mitigation by:?Self insurance ?Crop insurance ?Index based insurance ?Weather derivatives (soon will be introduced in market)
Market risk
• Change in the price of commodity due to domestic or international change in demand and supply Price risk • Fluctuation in the prices of commodity due to appreciation/depreciation of currency • Change in the price of commodity due to change in interest rate by government or RBI.
Currency risk
Interest rate risk
Increase in employment rate Affect the prices on exchange Increase in spending power
Currency appreciates
Increase in demand but supply remain the same
Interest rate increases
Inflation increases i.e. price of commodity increases
Market risk Mitigation
Stress testing
Black Swan testing Well informed Fundamental analysis Technical analysis
Liquidity Risk
• Lack of marketability of an investment. Manifested by large bid and ask spread. • Money can remain blocked for long time. Risk can be mitigated by:?Avoid to invest in low volume traded commodity.
Operational risk
• Risks arising from the people, systems and processes. Risk can be mitigated by:?Adequate means of monitoring and measuring movement of commodity. For eg:
• Trade confirmation • Invoicing constitutes
Political Risk
• Political change that alters the expected outcome and value of a given economic action by changing the probability of achieving economic objectives. • For eg:- At the time of war or any political instability in the country affect the commodity prices indirectly. As this has greater impact on the import and export of the country. Moreover it will affect the capital inflow in the country from other country in form of FIIs.
Contd…
Political Risk
Impact the import/export and capital inflow
Affect the currency
Affect the Commodity
Risk mitigation
Customized analysis
In-depth subject matter reporting
Information that can enable an investor or firm to calibrate their risk appetite
Contingency planning, intellectual property safeguards, risk diversification and sound exit planning to guard against uncertainty. Transferring risk to other party like Insurer or Hedger
Commodity Risk Management Strategy
• Sustainability:- commodity risk is highly volatile and requires continuous monitoring and validation • Efficiency:- aims to ease the burden by leveraging common control monitors, processes, assessments and information. • Transparency:- greater transparency into key-risk indicators • Risk calculation. range of value at risk (VaR) models utilizing analyses such as Monte Carlo simulations
• Risk intelligence. Good information to ? Understand their commodity price and supply risk, ? Identify potential conditions/uncertainties Define key risk indicators to manage uncertainty ? Predict outcomes • Risk collaboration. provides integration and oversight with both accounting and compliance scrutiny to avoid issues with regulators • Risk modeling : models pointing failure or uncertainty and predicts what can happen to the business.
doc_262155908.pptx