Commodity risk officers and managers Mitigating financial risks for business resilience.

Financial hedging can bring stability and predictability to the earnings of physical transactions. Through financial derivative instruments—such as forwards, futures, options, and swaps—commodity trading firms can offset the risk of adverse price movements to protect the P&L of their physical positions. Commodity producers also utilize financial hedging to lock in prices of their physical products ahead of harvest via futures. By securing a price, producers can cover their costs and expected margins to guarantee a minimum profit for their physical product.

Commodity firms often look to avoid the negative impacts of price volatility by using the same underlying price, with different basis, on both purchases and sales. While this reduces the impact of price volatility, it introduces supply chain risk. To mitigate the effects of supply and demand imbalances, commodity firms rely on effective scheduling, storage, and inventory management. By building flexibility into their supply chains, they can optimize their physical assets to avoid the negative consequences of supply and demand imbalances.

Commodity trading firms often have separate teams managing various commodities across different regions. This introduces vulnerabilities that can go unnoticed when only managing risk at the book level. By consolidating physical and financial positions across the entire enterprise, firms can expose the risks associated with being overly dependent on certain counterparties and operational areas for supply, sales, logistics, and storage. This tactic also identifies natural hedges between asset classes and currencies, reducing the need for additional risk management efforts.