Risk
The four risk dimensions every commodity trader must understand and manage.
Market Risk
The risk that commodity prices move adversely. In dry bulk, freight rates can halve in weeks. In energy, oil can swing 30% in a month. Market risk is managed with futures, FFAs, and options. The challenge is basis risk — the hedge rarely perfectly offsets the physical position.
Key Concepts
Tools
CME Group futures · ICE futures · LME options · Baltic FFA market
Freight Risk
The risk that shipping costs deviate from expectations, eroding the margin on a physical commodity trade. A coal trader who has sold coal for delivery at a fixed CIF price but hasn't locked in freight is exposed to rising Capesize rates. Managed with FFAs.
Key Concepts
Tools
Baltic Exchange FFAs · ICE FFA clearing · FIS broker
Credit Risk
The risk that a counterparty fails to pay or deliver. In commodity trading, credit risk is pervasive — you may have delivered cargo and be owed millions. Managed through letters of credit (LCs), bank guarantees, credit insurance, and tight counterparty due diligence.
Key Concepts
Tools
Documentary LC · Euler Hermes credit insurance · ICISA members
FX Risk
Most commodities are priced in USD, but production costs are in local currencies (BRL, AUD, ZAR, etc.). A Brazilian iron ore miner's costs are in BRL; if BRL strengthens, margins are squeezed. For traders, FX risk arises when revenues and costs are in different currencies.
Key Concepts
Tools
FX forwards · NDFs for emerging market currencies · Bloomberg FX