The Handbook of Commodity Investing

CHAPTER 26

Securitization of Commodity Price Risk

Paul U. Ali

Associate Professor

Melbourne University Law School

Securitization typically involves removing selected income-producing assets, such as mortgages, trade receivables, and corporate loans, from the balance sheet of a corporation or financial institution and repackaging those assets into securities that can readily be sold to investors in the capital markets. The investors are exposed to the risks of the assets, not to the risks associated with the corporation or financial institution, and, in this manner, the corporation or financial institution is able to raise funds more cheaply than if it had raised funds directly on the strength of its own balance sheet.¹

Over the last decade, securitization has evolved from being primarily a fund-raising instrument to also encompassing the issue of securities principally for hedging purposes. The latter involves the unbundling of risks with investors being given exposure only to specific risks, ranging from risks that attach to individual assets or business lines to enterprise-wide risks, in contrast to having exposure to the entirety of the risks associated with particular assets. In theory, any risk that is capable of being quantified can be individually securitized employing this newer form of securitization. Credit risk, catastrophic risk, and mortality risk are among the specific risks that have been successfully transferred to investors using such securitizations.²

The structures ...