Commodity Price Risk


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.

BREAKING DOWN '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.

  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. Commodity

    1. A basic good used in commerce that is interchangeable with ...
  4. Option

    A financial derivative that represents a contract sold by one ...
  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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  1. What are the primary sources of market risk?

    Market risk is the risk of loss due to the factors that affect an entire market or asset class. Market risk is also known ... Read Full Answer >>
  2. In forex, what are the commodity pairs?

    In forex, the commodity pairs consist of the heavily-traded currency pairs and contain the Canadian, Australian and New Zealand ... Read Full Answer >>
  3. How are foreign exchange rates affected by commodity price fluctuations?

    In the foreign exchange (forex) market, currency valuations move up and down as a result of many factors, including interest ... Read Full Answer >>
  4. How do hedge funds use equity options?

    With the growth in the size and number of hedge funds over the past decade, the interest in how these funds go about generating ... Read Full Answer >>
  5. Can mutual funds invest in options and futures?

    Mutual funds invest in not only stocks and fixed-income securities but also options and futures. There exists a separate ... Read Full Answer >>
  6. Can mutual funds invest in commodities?

    Mutual funds can invest in commodities. In fact, mutual funds may provide a better way for investors to gain exposure to ... Read Full Answer >>

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