Commodity Risk

Commodity risk refers to the potential for financial loss due to fluctuations in the prices of commodities such as oil, natural gas, metals, or agricultural products. This type of risk affects businesses that produce, trade, or rely on commodities, as changes in commodity prices can impact costs, revenues, and profitability. Commodity risk can be managed through hedging strategies, such as using commodity futures contracts or swaps to lock in prices and protect against adverse price movements.

Example

An airline company exposed to rising fuel prices may face commodity risk, as an increase in the price of crude oil can significantly raise its operational costs. To mitigate this risk, the company might hedge by purchasing fuel futures contracts.

Key points

• Commodity risk is the potential for financial loss due to fluctuations in commodity prices.

• It affects businesses involved in production, trading, or relying on commodities.

• Hedging strategies, like futures and swaps, can mitigate commodity risk.

Quick Answers to Curious Questions

What causes commodity risk?

Commodity risk is caused by fluctuations in the prices of raw materials like oil, metals, and agricultural products, which can impact the profitability of companies dependent on these commodities.

How can companies manage commodity risk?

Companies manage commodity risk through hedging strategies such as commodity futures, options, and swaps to lock in prices and minimize the impact of price fluctuations.