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Commodity Risk Management - Essay Example
Author : kendrickwyman
Pages 16 (4016 words)
International trade, which is carried out across country boundaries involves the exchange of commodities such as crude oil, agricultural products, natural gas, minerals and other commodities. The market of these commodities is constantly fluctuating, this makes them very volatile…
Commodities with higher price volatility subject the consumer or the producer to greater probability of incurring loses or attaining gains on the future sales and buying of the product. Commodities with greater share in enterprise earning or production costs are faced with greater exposure to price risks. Various commodity risk management instrument are available and are mostly used by large producing firms, large consuming firms, trading firms, marketing firms or departments and other business ventures. The current market trends have led to the limitation of middlemen and traders and the transactions between the producer/ manufacture and final consumer have increased considerably. When the world commodity prices fall, the producer is at risk as he is not able to cover for his production costs. Also, a commodity dealer who buys products and keeps them in a warehouse is faced by the risk of not recovering his original purchasing costs. Those who process the goods are faced by double risks due to the inputs and outputs. The final consumer only experiences the problem of increased prices. Price risks also affect traders, importers and exporters (Rutten and Blarel, 1996)
The are several methods that are adopted for the management of commodity price risks, These include the adoption of marketing strategies that help time sales and purchases, Forward contr ...