Commodity risk is a term used to describe the level of volatility or risk associated with commodity trading in the futures market. Investments in commodities such as electricity, metals or grains and can fluctuate based on factors such as the supply in part value, demand for these products, and even events like the outcome of political elections or changes in the general economy. The goal of investors is to consider the possibility that future events that adversely affect the price of commodities derivatives and futures contracts structured these contracts so that the level of risk is kept within a reasonable range.
There are several different types of commodity risk that investors consider closely before you get into a futures contract. One of the most common problems to address is the degree of risk associated with the unit price of raw materials. In this case, the investor will weigh the possibility that changes in exchange rates or downward trends in local or global prices that could cause investment to perform poorly, and determine if it is likely that the yield returns sufficient to justify taking on the risk of the futures contract.
The risk assessment also requires commodity consider how much risk is inherent to the agreement. The possibility of some kind of interruption in production is considered, including the impact of the reduction product available on the market and the price of commodities. At the same time, the possibility of a sudden increase in production exceeding demand and makes the price of commodities to sink is also an important consideration.
Political risk is a third component to be included in the risk assessment of commodities.Here, the aim is to project accurately the outcome of the elections in the performance of the raw material on the market, at least for the duration of the futures contract. This includes allowing disorders in which a candidate was unlikely to be elected does not really capture the popular vote as well as the determination of what is likely to happen to the price of the commodity if the candidates were favored to win the elections.
As with any investment, commodity risk requires that investors look closely at all the factors that could adversely affect the performance of the asset at any time during the futures contract. To accurately assess the degree of risk and predict accurately the outcome of the contract once called or reaches maturity, investors can get a return on health for their efforts. Should these projections be faulty or fail to include consideration of relevant information, the possibility of failure is higher and the chances of losing money instead of earning a return are higher.
- Commodity risk is a term used to describe the level of volatility or risk associated with commodity trading in the futures market.