Value-Chain vs Dedicated CTRM Solutions
Trading commodities is risky. Inherent price volatility has to be contained, monitored and optimized and efficient IT tools are mandatory in doing so. While different types of CTRM solutions are proposed to trading companies, it remains a real issue to find the most adapted risk management system for specific needs.
By Kévin Guenver
TRADITIONALLY, ALL COMMODITY cash markets followed the same path: flat trends with low market price variations, often only correlated by seasonality and weather markets as well as supply/ demand variables in a macroeconomic and often local perspective. The first futures contracts appeared in grain market in the middle 19th
century, designed to help
trading companies insure some of their revenues. Quickly, the link between cash and futures markets was made by the establishment of basis
basis contracts, OTC and futures options, swaps and structured products are leading agricultural trading strategies, significantly increasing the complexity of trading and operations management. At the same time, financial investors have been
moving into the commodity complex looking for superior returns and traditional diversification properties. This has created a tidal wave of activity in cash and futures markets. However, the liquidity brought by these new players and instruments was closely followed by much higher price volatility for agricultural products. These products include vanillas options, structured products (Asian options, exotic, all OTC contracts) and swaps, means that trading companies must now carefully follow derivatives markets and monitor open positions both on cash and futures. By means of this financialisation of commodities,
different strategies (hedging, arbitrage, speculation, optimization) which are naturally applied in the financial sector are now in use by most major agricultural trading operators. The more complicated these instruments have become, the greater risks – and rewards – market players are exposed to.
... spreadsheets, far from
insuring security, open up the firm to serious errors
contracts, where the commitment on quantity and premium on the physical markets are negotiated between the parties, with the price determination occurring on futures exchanges.
Risk Management Issues In the commodities business, the use of Excel
spreadsheets was the natural answer in dealing with simple long/short positions. Today, futures,
48 June 2012
To ensure both security and profit, it has therefore become mandatory to equip all market operators with reliable IT solutions. While ‘cost-less and easy to use’ spreadsheets have been used for decades in commodity trading operations they now present significant disadvantages as operators have to manage a multitude of products, strategies, workflows, and reporting requirements. In a spreadsheet environment, first, each trader
must create their own sheets ... with no reliable means of correction when they become too big. Indeed, spreadsheets are unstable as operators must insert hundreds of contracts into several positions with ‘bugs’, loss of time, and loss of data often occurring.
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