Commodity Markets: Managing Risk During Times of Volatility

This paper examines the distinctive challenges in risk management that commodity trading firms face and how they are responding to such risks to endure market disruptions.

The commodity markets have encountered significant obstacles due to the COVID-19 pandemic, the conflict in Ukraine, and subsequent sanctions imposed on Russia. These exceptional occurrences have led to fluctuations in the supply and demand, disruptions in global supply chains and a surge in volatility.

Commodity trading firms encounter various risks that can be challenging to monitor and control. Certain risks, such as credit, operational, political, legal, and reputational risks, are mitigated through insurance contracts. On the other hand, risks like market and liquidity risks are actively hedged in the financial markets. Firms typically vigilantly monitor and allocate risk capital for those risks that cannot be insured or hedged. In order to navigate through this volatile and intricate market, companies are re-evaluating their risk management processes and systems.

Traditionally, commodity trading firms have been slow to adopt leading edge technology. Within the risk management function, they have relied on fragmented processes and tools like spreadsheets and email to calculate exposures and implement workflows. Advances in database, cloud and messaging technologies have the potential to deliver integrated systems that can consolidate and present a holistic view of risk.

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