Commodity Price Risk

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DEFINITION of 'Commodity Price Risk'

The threat that a change in the price of a production input will adversely impact a producer who uses that input. Commodity production inputs include raw materials like cotton, corn, wheat, oil, sugar, soybeans, copper, aluminum and steel. Factors that can affect commodity prices include political and regulatory changes, seasonal variations, weather, technology and market conditions. Commodity price risk is often hedged by major consumers.

INVESTOPEDIA EXPLAINS 'Commodity Price Risk'

Unexpected changes in commodity prices can reduce a producer's profit margin, and make budgeting difficult. Fortunately, producers can protect themselves from fluctuations in commodity prices by implementing financial strategies that will guarantee a commodity's price (to minimize uncertainty) or lock in a worst-case-scenario price (to minimize potential losses). Futures and options are two financial instruments commonly used to hedge against commodity price risk.

RELATED TERMS
  1. Commodity Market

    A physical or virtual marketplace for buying, selling and trading ...
  2. Commodity Swap

    A swap in which exchanged cash flows are dependent on the price ...
  3. Option

    A financial derivative that represents a contract sold by one ...
  4. Commodity

    1. A basic good used in commerce that is interchangeable with ...
  5. Hedge

    Making an investment to reduce the risk of adverse price movements ...
  6. Swap

    Traditionally, the exchange of one security for another to change ...
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