Case Studies from Commodity Derivatives Debacles

Abstract

Until recently, one could only gain expertise in commodity-derivatives relationships if one had worked in niche commodity-processor companies or in banks that specialized in hedging project risk for natural-resource companies. The contribution of this paper is to help fill the knowledge gap in the risk management of commodity derivatives trading. The paper emphasizes the constant challenges to a trader when attempting to navigate the very dynamic flows of both the commodity markets and the prevailing risk environment. The paper also emphasizes that operational controls are paramount in an age of increasing legal and regulatory risk, particularly for firms involved in large-scale commodity derivatives trading.