About two weeks ago, I participated in a discussion on Nikkei CNBC (a business news channel in Japan) about economic and geopolitical events that impact the market. Event risk is a reoccurring theme and it’s important for risk managers to continually evaluate the right mix of hedge ratios, duration and tools with this in mind.
Unpredictability of commodity prices.
Long-term commodity scarcity.
Sudden one-off supply disruptions.
These are the big issues impacting most companies when it comes to commodity markets in 2017.
What’s more, companies are also coming off a year of dealing with an uncertain and volatile business climate fueled by events like Brexit, the U.S.
By: Andrew Brodbeck
The surprises of 2016 have been written about ad nauseam, but the outcomes remind us about known unknowns: event risks we are aware of, but whose outcome has unknown consequences. Many companies we talk with are comfortable with short-lived bouts of price volatility, whether commodities or foreign exchange, because it normalizes, and the way of doing business doesn’t materially change.
Historically, steel has been a very volatile commodity –in part because of limited liquidity and barriers to effective hedging outside of supply chain contracts. Today, that path to more effective risk management has fewer roadblocks with the introduction of the Chicago Hot Rolled Contract (HRC) among others, providing greater depth for the bid/ask spread.
Argentina is home to the third-largest economy in Latin America with a GDP of nearly 550 billion dollars. While primarily driven by its agricultural and livestock industries, Argentina is growing in other sectors including energy, automotive and biotechnology.
When I talk about building a diversified hedging portfolio as a business, I often use the analogy of building an investment portfolio as an individual.
With an individual investment portfolio, a mix of different, non-correlated asset classes (i.e., stocks, bonds, etc.) is used by wealth management advisers to minimize risk and maximize long-term results—no matter if it’s a bull or bear market.
For the last 20-plus years, the term “VaR” has been used fairly frequently at big banks across the world. That’s because banks have been using VaR (value at risk) as a statistical tool to proactively manage risk for their clients for decades.
Commodity markets are facing many challenges today with oversupply, low prices and uncertainties, making managing price risk a critical skill for financial professionals. The 2016 AFR Risk Survey from the Association of Financial Professionals revealed commodity prices are one of the top drivers for earnings uncertainty across industries.