Question

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

Answer 1

Risk associated with commodity trading are as follows-

A. Variation of the prices of various commodities is most important and affecting risk in trading of commodity because it would be leading to change in the underlying value of the security and it would relate to change in the exposure of various traders in the commodities markets.

B. Political risk is related to change in macro policies of the government to a large extent because government will be constantly changing their minimum support price and other commodities related pricing regulations which will be continuously affecting these prices of commodities and it will be leading to a higher risk related to changing in the overall external environment of the commodity trading.

C. Volatility due to International factors are more visible in the commodities market because Oil Markets and gold markets are often highly volatile and they will be reflecting the changes in the sentiments of the Global investments and pricing fixation by the OPEC as well so they will be leading to very high risk related to volatility because there would be a higher amount of volatility in commodities trading than the equity trading due to higher uncertainty.

D. lack of underlying securities in the market - unlike stocks, the commodities units are not traded in the cash market and these are not representing the ownership of commodity in the stock market so they are only available as derivative and they cannot be held in any other market so there is a risk related to lower possibility of hedging of these risk.