Commodity Price Risk Research Articles

Asymmetric risk contagion effect of the interaction between the real economy and the financial sector—an analysis based on the domestic commodity price index

As the uncertainty of the global economy intensifies, domestic real economy risks and financial risks may interact and worsen under international risk shocks. Commodity prices are an important channel for transmitting international economic and financial risks. Taking January 2007 to July 2021 as the sample period and using data from nine commodity price indices and banking, diversified finance, and insurance industry indices, this article uses rolling regression method to construct different commodity price risk and financial sector risk indicators. Combined with a vector autoregressive model, the risk contagion effect is calculated. The analysis indicates that there exist significant asymmetric risk contagion effects between various commodities (with energy and steel having the largest risk spillover effects) and there are significant net risk spillover effects on financial sectors (with insurance having the largest risk spillover effect). There are asymmetric risk contagion effects among different financial sectors, with varying degrees of risk spillover effects on commodity prices (with the banking sector having the greatest risk spillover effects on commodity prices and other financial sectors, and diversified finance having the greatest risk spillover effect on commodities). During major global financial events, the risk spillover effects of commodities and input effects increase significantly due to the intensification of the risk spillover effects of energy, steel, and nonferrous metals. The risk spillover effect between commodities and the overall risk spillover effect have significantly increased. The financial sector’s overall net risk input effect has increased, while the net risk input effect of the insurance sector has also increased. These findings are significant for improving systemic financial risk monitoring indicators and adopting accurate prevention and control measures.

The global risk trinity of hydrocarbon economies: Evidence from the method of moments quantile regression

This paper addresses the critical requirement to understand how global political and economic trends affect stock market dynamics in the Gulf Cooperation Council (GCC) region. Prompted by the region's economic dependency on oil and the growing integration of GCC markets into global financial systems, it investigates the impact of three global risk factors on both Islamic and conventional stock markets in the GCC: financial risk (US CDS and global interest rate volatility), commodity price risk (oil price volatility), and political risk (global geopolitical risk). The present research adopts the method of moments quantile regression to assess the asymmetrical effects of these risks across various market conditions from 2011 to 2021. The findings show significant disparities in stock market responses to global risks in bearish, bullish, and normal states, highlighting the nuances of market dynamics in the GCC. In the face of rising global hazards, Islamic assets may provide potential for portfolio diversification. Policy recommendations emphasize the necessity of incorporating global risk variables into investment strategies to reduce volatility and improve market stability in the GCC.

A data-driven approach for optimal operational and financial commodity hedging

Commodity price risk management has been subject to various modeling and optimization approaches. Recently, data-driven policies focusing on the decision rather than prediction quality have been developed to overcome price model misspecification. Yet, in the context of data-driven commodity purchasing, the existing literature either considers anticipatory inventory management or forward contracting where the decision frequency corresponds to the maturity of the traded contracts. We prove the optimality of a novel procurement policy combining operational and financial instruments with decision granularities independent of the derivative’s maturity. A mixed-integer programming model is developed to train policy parameters efficiently. We study the implications of policy complexity for learning-stability and out-of-sample generalization. Finally, we backtest the data-driven policy on real market data of four major commodities (i.e., copper, nickel, corn, and soybean) over ten years and show that the average savings potential of a combined financial and operational procurement policy compared to single-instrument strategies is up to 6.38% for corn where warehousing can efficiently mitigate price seasonality. The approach hedges corn and soybean commodities more efficiently through inventories while copper and nickel can be hedged efficiently by leveraging available financial instruments. Best model results are identified for a decision granularity with fewer parameters as high-frequent decisions deteriorate learning stability and model generalization.

Broken Hill Proprietary Billiton report: Analysis Available Strategy to Hedging Risks by Using Futures Contracts, Foreign Exchange Futures

With the development of multinational companies, plenty of companies confront enough problems in financial management. This paper using real figure analysis method to conclude companies financial problems. After data analysis, we found Broken Hill Proprietary Billiton as one of the multinational company, it faced enough problems as commodity price risk, currency exchange rate risk and interest rate risk. In this case, hedging strategies with derivatives are used to minimize the risks of financial loss. Futures contract can be used to deal with commodity price risk and risks of currency exchange risk by locking in price and reduce uncertainty of market movements. Finally, contrast advantages and disadvantages for each strategy. After analysis of Broken Hill Proprietary Billiton, it could provide enough strategies to alleviate financial risks for multinational companies.

Hedging with Financial Derivatives and Firm Performance of Consumer Goods Companies Listed on Nigeria Exchange Group

Hedging with derivatives is a common strategy to manage foreign currency risk, interest rate risk, commodity price risk and mitigating potential losses or gains that might arise from fluctuations in the market. This study was conducted to reveal findings on the impact of hedging activities using derivatives on the financial performance of consumer goods companies listed on Nigerian Exchange (NGX). The independent variables for the study are foreign currency hedge, interest rate hedge and commodity price hedge. Data were collected from Ten (20) consumer goods companies quoted on Nigerian Exchange covering 2018 to 2022 financial years. The results of hypothesis testing reveal that hedging with derivatives has a significant effect on firm performance. This findings supports the findings of Alan and Gupta (2018) and Lenee and Oki (2017), who conclude that the use of hedging can minimize the volatility and has a positive effect on firm value. As a general recommendations, it is important to note that regulating the derivatives market is essential to ensure stability, transparency, prevent excessive speculation, manipulation, and enhance fair practices in the financial system.

Hedging behavior of agribusiness cooperatives and investor-owned firms in Germany

While agriculture is unique with respect to the prevalence of producer owned cooperatives (coops) operating alongside and investor owned firms (IOFs), little is known about their relative reliance on futures markets to hedge commodity price risk. This study investigates factors influencing the hedging behavior of both business forms and finds that each are significantly impacted by the perspective of key influencers of their decision making units (e.g., employees, members, shareholders, board of directors, advisors, consultants, bankers). Notably, coops are found to be more likely to hedge using futures but do so more sparingly (i.e., lower hedging ratios), which may reflect an ability to conduct natural hedges internally and/or less speculative positions taken in futures markets. [Econ Lit classification: Q130].

Systemic Risk and Stock Market Return: A Vector Error Correction Estimate from Nigeria

This study examined the effect of systemic risk on the stock market return in Nigeria. Time series data were sourced from Central Bank of Nigeria statistical Bulletin from 1990-2021. Stock market return was modeled as the function of exchange rate risk, commodity price risk, equity price risk and interest rate risk. Multiple regressions were formulated to examine the effect of systemic risk on stock market return. Ordinary least square methods were adopted as data analysis methods. R-square, adjusted R-square, T-statistic, regression coefficient, f-statistic and Durbin Watson were used to examine the effect of systemic risk on stock return. The study found that systemic risk explained 62.8 percent variation in stock market return over the time covered in this study. The study found that exchange rate risk has negative and no significant effect, commodity price risk have positive and significant effect, interest rate have positive and no significant effect while equity price risk have positive and significant effect on stock market return. From the regression summary, the study concludes that systemic risk has significant effect on stock market return in Nigeria. The study recommends that systemic risk management should be considered as part of strategic plans which need to be reviewed on a more frequent basis and macroeconomics policies should directed towards stabilizing Nigerian exchange rate to avoid depreciating naira exchange rate against key currencies that exposes the firms to exchange rate risk.

A changepoint analysis of exchange rate and commodity price risks for Latin American stock markets

Focusing on countries whose economies are exposed to fluctuations in commodity prices and exchange rates, we study the vulnerability of these stock market returns to exchange rate and commodity price shocks using non-parametric structural break tests for volatility and dependence. The return distributions are modeled using a Copula-GARCH model incorporating the estimated changepoints and we measure risk-spillovers with the conditional Value-at-Risk. We find evidence for various changepoints at different points in time, implying changes in risk and spillovers. In particular, there is evidence of increased spillover risk after the outbreak of the global financial crisis in 2008, as well as higher conditional risk following the Covid-19 outbreak.

Basis Risk Analysis and Countermeasures for Enterprises’ Commodity Price Risk Management by Using Futures Hedging Strategy -- A Case Study of “Metallgesellschaft” Hedging Failure

As the international economic situation was risingly unsteady and turbulent, many enterprises have come up to make use of the futures market to minimize commodity price fluctuation risks, however, not a few suffering massively high hedging losses. These events has showed that numbers of enterprises had a lack of incisivel comprehension of the basis risk of hedging and made no fully preparation on how to control and erode losses in time as soon as the basis transfers deviated from expection. This article intends to make an in-depth discussion on basis risk through the analysis of the well-known huge losses case of the Metallgesellschaft and put forward effective and logical countermeasures, for enterprises grasping potently of basic risk resisting financial damage. In short, in order to lesson the high financial loss which exceeds the expectation caused by the unusual basis, the enterprises must establish a reasonable and supportive hedging risk assessment and optimal protective stop-loss scheme.

Promoting financial stability of oil producers: Operational vs. financial hedging

This paper investigates the effects of operational hedging on commodity price risks. It explores a novel type of operational hedging, i.e., the natural operational hedge position between upstream crude oil production and downstream activities in the supply chain. Using hand-collected data from 293 unique oil-producing firms, we find that operational hedging is sufficiently effective in reducing firms’ exposure to oil-price risk. We also find an inverse relationship between operational and financial hedging, suggesting that they can substitute for each other.

Corporate commodity exposure: A multi-country longitudinal study

This paper conducts a large-scale multi-country longitudinal study and examines the extent that firms are exposed to commodity price risk in 23 OECD countries. An industry analysis reveals that all industries are significantly exposed to commodity price movements ranging between 8 and 10% except for the energy sector where 38% of firms being significantly exposed. Investigating the determinants of commodity price exposure, we report that firm size is negatively associated with commodity exposure, while the fraction of R&D expenses, leverage, country GDP, and sophistication of the financial derivatives markets are positively related to commodity price exposure.

Commodity price volatility, risk exposure and development of financial institutions

PurposeThis study examines the dynamics of financial institution development among economies in sub-Saharan Africa (SSA) and how volatility in forex-adjusted price of key globally traded, commodities and macroeconomic risk influence such development.Design/methodology/approachThe study is based on data collected from the period starting 2001 to 2019 for relevant variables; and the empirical test was performed using the two-step system generalized method of moments (TSS-GMM) estimation method.FindingsEmpirical estimates suggest that volatility in forex-adjusted prices of crude oil and cocoa are inimical to development of financial institutions among economies in the sub-region. On the other hand, volatility in the price of gold is found to have a significant positive effect on development of financial institutions. Additionally, political instability is found to exacerbate the adverse effect of volatility in the price of globally traded commodities on the development of financial institutions in the sub-region.Originality/valueThe study verifies how volatility in forex-adjusted prices of key traded commodities on the global market influence development of financial institutions in the sub-region. Additionally, the study examines the impact of macroeconomic risk, a principal component analysis (PCA) constructed index on the development trajectory of financial institutions. Finally, the authors examine the moderating role of institutional quality and political instability in the relationship in question.

Modeling tail risk in Indian commodity markets using conditional EVT-VaR and their relation to the stock market

Investment in commodity markets in India accelerated after 2007; this was accompanied by large price variability, hence, it becomes imperative to measure commodity price risk precisely. It becomes equally important to study the relationship between commodity price variability and the stock market. Hence, this study aims to calculate the tail risk of highly traded Indian commodity futures returns using the conditional EVT-VaR method for risk measurement. Secondly, the linkage between commodity markets and the stock market is also studied using the Delta CoVaR method. Results highlight the following points. There is risk transfer from the extreme increase/decrease in crude oil futures returns to the Nifty Index returns. Both extreme price increase or decrease of crude oil futures driven either by financial or a combination of financial and economic shocks affect the stock market. Zinc and Natural gas futures are not linked to the stock market, which means they can be useful in portfolio diversification. The findings suggest that, in Indian commodity markets, EVT-VaR is a useful tool for measuring risk. Only Crude oil futures shocks affect the stock market, and extreme integration between them becomes more prominent when oil shocks are driven by financial factors. Commodities other than Crude oil are not integrated with stock markets in India.

Market Risk Management Practices of the Indian Banking Sector: An Empirical Study

The primary objective of this paper is to examine the market risk and liquidity risk management techniques and practices followed by the Indian scheduled commercial banks (SCB) consisting of public sector banks (PSBs) and private sector banks (PVSBs) for five years from 2016-17 to 2020-21. The other objective is to compare market and liquidity risk management practices between the public sector banks (PSBs) and private sector of banks (PVSBs). The other purpose of the study is to review the strategies adopted by the SCBs in risk management practices. To study the risk management practices, six largest banks each from PSBs and PVSBs are taken for sample study. This study finds that the SCBs are facing credit risk, market risk (Interest rate risk, foreign exchange risk, commodity price risk and equity price risk,) liquidity risk and operational risk. It also finds that the PSBs are better reporting and presenting their risk management practices in their annual reports than that of PVSBs in risk identification, risk assessment and risk analysis. The results indicate that there is no significant difference between the PVSBs and PSBs in the policies and practices of market risk and liquidity risk assessment, evaluation, monitoring risk controlling and risk taking. This paper will be relevant and value to those interested in research in the risk management banking industry. This is a descriptive research based on secondary data.

The effect of hedging exchange rate risk, interest rate risk and commodity price risk with derivative instruments on firm value

The purpose of this paper is to analyze the effects of firm value on hedging for exchange rates, interest rates and commodity price risks using derivative instruments as well as examining different types of derivative instruments, including forward contract, future contract, option contract, and swap contract, used as hedging instruments to assess their various effects on firm value. The proxy used for the firm value variable is Tobin’s Q, and the ordinary least squares regression is employed for the research method. The study used 348 records from non-financial companies listed on the Indonesia Stock Exchange over the period 2015–2018. There are different results. First of all, the use of hedging for exchange rate risk with derivative instruments has a positive and significant effect on firm value. Secondly, the use of hedging for interest rate risk with derivative instruments has a negative but not significant effect on firm value. In addition, the use of hedging for commodity price risk with derivative instruments has a positive but not significant effect on firm value. Moreover, the effects from hedging using derivative contracts in general on firm value does not give results that are different from the use of hedging risk for exchange rates, interest rates and commodity prices with derivative instruments.

Using conditional asymmetry to predict commodity futures prices

Despite decades of studies, there is still no consensus on what type of serial dependence, if any, might be present in risky asset returns. This manuscript provides an empirical study of the prices of energy commodities, gold and copper in the futures markets and demonstrates that, for these assets, the level of asymmetry of asset returns varies through time and can be forecast using past returns. A regime switching model is used to construct a managed futures trading strategy that provides returns that are statistically significant. It is also demonstrated how such model can be used to make probabilistic predictions of commodity prices in futures markets, which can be used to drive value-at-risk and potential future exposure metrics or guide dynamic hedging strategies of commodity price risk.

Measuring the financial effects of mitigating commodity price volatility in supply chains

Purpose Firms can choose from an array of approaches for reducing the detrimental financial effects caused by unfavorable fluctuations in commodity prices. The purpose of this paper is to provide guidance for effectively estimating the financial effects of mitigating commodity price risk volatility (CPV) in supply chain management decisions. Design/methodology/approach This paper adopts two prominent and complementary methodologies, namely, total cost of ownership (TCO and real options valuation (ROV), to illustrate how commodity price risk mitigation strategies can be analyzed with respect to their effect on costs and performance. The paper provides insights through a case study to demonstrate the application of these methods together and establish the benefits and challenges associated with their implementation. Findings The paper illustrates advantages and disadvantages of TCO and ROV and how these approaches can be adopted together to contribute to effective purchasing decisions. Supply chain flexibility is a key capability but requires investments. Holistically measuring the financial effects of flexibility investments is imperative for gaining executive management support in mitigating commodity price volatility. Research limitations/implications This study can provide supply chain professionals with useful guidance for measuring the costs and benefits related to developing strategies for mitigating commodity price volatility. TCO provides a focus on the costs associated with the commodity purchasing process, and ROV enables the aggregation of all the costs and benefits associated with the use of the strategy and synthesizes them into the net value estimate. Originality/value The paper provides a comparison of different but complementary approaches, specifically TCO and ROV, for analyzing the effectiveness of CPV risk mitigation decisions. In addition, these two methods allow supply chain professionals to evaluate and control the financial effects of CPV risk, particularly the impact of mitigation on firm’s cash flows.

Is corporate hedging always beneficial? A theoretical and empirical analysis

This paper investigates, theoretically and empirically, the impact of corporate hedging activities on firm value/performance. In a perfect market, with self-less management, aiming to maximise shareholder wealth, it may be expected that hedging would improve firm performance and add value. Our major contribution in this paper is that we first demonstrate theoretically the conditions under which hedging can increase or decrease firm value. Our theoretic model demonstrates that the ambiguous relationship between hedging and firm value may be due to a subtle combination of economic (managerial self-interest, agency problems/moral hazard, managerial ability, managerial risk aversion) and behavioural factors (overconfidence). Our empirical analysis confirms the ambiguous effect of hedging on firm performance. Empirically, we focus on the use of derivatives in the corporate hedging of three types of financial risk (foreign currency, interest rate and commodity price risks), and examine the effect on value and performance of listed UK corporations during 2005–2017. We demonstrate that the positive or negative effects of the hedging strategies varies significantly across both the financial risk that is hedged and the type of derivatives contracts used in the hedging as well as the time period in consideration.

The effect of inventory turnover on financial performance in the US restaurant industry: The moderating role of exposure to commodity price risk

Despite the importance of efficiently managing inventory in the restaurant business, evidence of satisfactory inventory turnover in the restaurant industry remains limited. This study examined the relationship between inventory turnover and firm performance as well as the moderating role of exposure to commodity price risk therein. We collected data representing publicly traded US restaurant companies from the Mergent Online’s database for the period from 1999 to 2015. The results indicate there is a positive relationship between inventory turnover and corporate financial performance. Moreover, we found that the interaction effect of exposure to commodity price risk on the relationship between inventory turnover and firms’ profitability. To our knowledge, this is the first study empirically examining the adoption of inventory management by the restaurant industry. Also, these findings provide the importance of effective inventory management based on the specific type of restaurants.

UNIVERSITY OF GEORGIA ROUNDTABLE ON: Enterprise‐Wide Risk Management

For many years, MBA students were taught that there was no good reason for companies that hedge large currency or commodity price exposures to have lower costs of capital, or trade at higher P/E multiples, than comparable companies that choose not to hedge such financial price risks. Corporate stockholders, just by holding well‐diversified portfolios, were said to neutralize any effects of currency and commodity price risks on corporate values. And corporate efforts to manage such risks were accordingly viewed as redundant, a waste of corporate resources on a function already performed by investors at far lower cost.But as this discussion makes clear, both the theory and the corporate practice of risk management have moved well beyond this perfect markets framework. The academics and practitioners in this roundtable begin by suggesting that the most important reason to hedge financial risks—and risk management's largest potential contribution to firm value—is to ensure a company's ability to carry out its strategic plan and investment policy. As one widely cited example, Merck's use of FX options to hedge the currency risk associated with its overseas revenues is viewed as limiting management's temptation to cut R&D in response to large currency‐related shortfalls in reported earnings.Nevertheless, one of the clear messages of the roundtable is that effective risk management has little to do with earnings management per se, and that companies that view risk management as primarily a tool for smoothing reported earnings have lost sight of its real economic function: maintaining access to low‐cost capital to fund long‐run investment. And a number of the panelists pointed out that a well‐executed risk management policy can be used to increase corporate debt capacity and, in so doing, reduce the cost of capital.Moreover, in making decisions whether to retain or transfer risks, companies should generally be guided by the principle of comparative advantage. If an outside firm or investor is willing to bear a particular risk at a lower price than the cost to the firm of managing that risk internally, then it makes sense to lay off that risk. Along with the greater efficiency and return on capital promised by such an approach, several panelists also pointed to one less tangible benefit of an enterprise‐wide risk management program—a significant improvement in the internal corporate dialogue, leading to a better understanding of all the company's risks and how they are affected by the interactions among its business units.