What Do You Understand By Commodity Risk Management?
Commodity risk is the risk that the business faces due to any change in the price and other factors related to the commodity along with the change of time and management of such type of risk are termed as the commodity risk management that involves lots of strategies like hedging on a particular commodity through the future contracts, forwarding contracts and the options contracts.
Sectors That Are Exposed To Commodity Risks
Generally, the manufacturers exposed to the price fall mean those who receive less revenue for the overall commodities they are producing. The sectors include-
- Mining minerals like gold, steel, coal and so on
- Energy sectors like oil, gas, electricity
- Agricultural sectors like wheat, cotton and sugar
Apart from these, consumers of the commodities like Transport companies, clothing, Airlines and food manufacturers are exposed to the rising prices, which will increase the price of the commodities they are producing. Furthermore, the exporters or the importers face the commodity risk due to the time lag between orders and receipts of the goods and exchange fluctuations. In a company, such types of risks should be managed in the right manner to focus on the main operations without being exposed to unwanted risks. Therefore, experts help you identify those risk management commodities to keep your business protected from the upcoming risks.
What Are The Various Types Of Risk Commodities?
The commodity players’ risks are classified into four categories: price risk, cost risk, quantity risks, and regulatory risks.
- The price risk happens due to the adverse movement in the prices of commodities that are determined by macroeconomic factors.
- The quantity risk arises due to several changes in the availability of the commodities.
- Cost risks now arise due to the adverse movement in the overall price of commodities that impact the business costs.
- Regulatory risk arises due to the change in the rules and regulations that have an impact on prices.
Ways How You Can Measure Commodity Risks
Measuring the risk cannot happen so easily; it requires a structural approach across all the business units like the production unit, marketing department, procurement department and the department of risk. Considering the commodity risks, many organizations are exposed to the core commodity risks, but they have to deal with the additional exposures. For example, if you consider a commodity product like steel, it is exposed to risks due to the steel prices. However, the overall changes in the oil prices, natural gas prices, and iron ore also affect the profitability of the cash flow.
Apart from this, if any import or export happens in the process, the currency movement will impact the cash flow. Some ways to measure the risk commodities include the sensitivity analysis, portfolio approach, value at the risk situations.
Suppose you want to manage the risk commodities. In that case, you should consider the following factors: production, hedging products that are available in the market, strategies adopted by the company in the process of marketing, sales, and purchase timing. Various enterprises work on commodity risk management that helps your business combat risk and reaches new heights.
On the other hand, suppose you have a commodity risk that is difficult to assess. In that case, you can take the help of the solution provided by Titantreasury that provides a clear view of the group-wide exposures or breakdown the business, pick up, process, export and do a lot of things. In addition, you can easily import the commodity contract and critical information for managing risk commodities with the help of this tool.
Commodity risk management is very important to reduce risks that are part of commodity trading.
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