Question

Appraise any four (4) risks that participants in commodity trading face.

Answer 1

Four risk that participants in commodity trading will be facing are as follows-

A. Higher volatility than stocks- commodity trading is more volatile than stock market due to higher level of uncertainty present and the underlying assets are also exposed to higher risk because these will be controlled by many factors like oil markets will be affected by OPEC to a large extent and similarly other commodities markets are also affected by the international factors to a large extent

B. Commodity markets will be also having a higher price risk associated with them because these commodities market will be exposed to higher uncertainties and volatility is higher leading to changes in their price as we have seen that recently oil has slipped into the negative territory which is not possible in the stocks so these volatilities are not needed to be Hedged.

C. Commodity market does not have presence of spot market and they will only with trading in the futures market so hedging will be very difficult in commodity market because there will be a risk associated with movement of their underlying securities which are not traded in the market so one will have to take opposite exposure in future market only because there is a limitation of hedging strategies.

D. Commodity trading is also exposed to high level of macro risk and government intervention because there are various commodities whose prices are controlled by the government to a large extent because we can see that there are minimum support price which are continuously announced and since these are related to the general public the pricing are controlled by the government so there is a high risk related to macro factors.