The Financial Times Handbook of Financial Engineering, 3rd Edition

21

MANAGING COMMODITY RISK

21.1 Commodity risk

21.2 Creating commodity derivatives

21.3 Using commodity derivatives

21.4 Hybrid commodity derivatives

We have so far looked at three sources of financial risk: currency risk, interest rate risk and equity risk. Many organisations, however, are exposed to a fourth source – commodity risk. In this chapter, we will discuss the nature of commodity risk and review some of the methods by which it may be handled. Fortunately, we will not need to break much new ground here because all the tools and techniques used to manage commodity risk have exact parallels with those employed in the management of other financial risks examined in the previous four chapters. We will therefore be able to avoid repetition ...