If prices would not move, there would be no price risk. In markets where the price level is regulated and, consequently, fixed for the remainder of the year, price volatility does not exist.
Risk is not a synonym for uncertainty, because risk can be quantified, whereas uncertainty cannot. Risk quantification is based on a formula including ‘probability’ and ‘effect’.
An exchange of futures for physicals (EFP) is a transaction process allowed by an exchange to enable market participants to manage their market risk with direct reference to the price of an underlying physical transaction.
In the commodity business, settlement is one of the main processes in deal-making. Settlement is the actual process that provides the final completion of a transaction; the unwinding of the transaction.
In order to guarantee the duties of a clearing house, market participants need to arrange for a guarantee for each position, for instance, being commodity (derivatives) contract.
In the field of trading operations, clearing of transactions is a very important process. Clearing is often considered guaranteeing the settlement of a contract between two parties, like a form of insurance.
Counterparty risk consists of delivery risk for the buyer and credit risk for the seller. These risks have to be managed by those parties who are involved with it.
Commodity trading can be considered a business function. As with any business, it has to be checked and verified by control functions and it has to be given assistance by support functions.
A rational market participant should be indifferent to buy an asset now or in time. Pricing of products should be accordingly, including commodities and financial instruments.
