ASSOCHAM

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ASSOCHAM

• 2nd Annual Commodities Conference

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Risk Management

• Key to
• Survival

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Risk Management

• Risk in Commodity Market
• Operational Risk
• Model Risk
• Liquidity Risk
• Legal Risk
• Settlement Risk
• System Risk

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Risk and Return

• Return
• Measure of Investment Performance.
• Risk
• Uncertainty of future return.

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Risk Management

• Risk is
• Likelihood of an unfortunate event.
• Uncertainty about the future.
• A possibility of adverse deviation from expected
  outcome.
• Subjective and differs from individual to
  individual

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Risk Management

• Risk to Market
• 1. Distortions in the Mandis
• - Isolation of Ahartias (Hazir bazar dealer).
• - Lack of personalized services in rural area.
• - Privity of contract between investor and
  Ahartia (commission Agent).

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Risk Management

• Risk to Market
• 2. Social and political compulsions.
• - Whether online exchanges have increased the
  speculation.
• - Whether the huge difference in spot market
  price and settlement day price is justifiable.

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Risk Management

• Risk to Market
• 2. Social and political compulsions.
• - Whether the entry of these exchanges have
  fueled the Inflation.
• - Open market position and cartelization.

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Risk Management

• Risk to Market
• 3. Systemic risk and Bottlenecks.
• - Late realization through banking channel.
• - Foreign exchange fluctuation.

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Risk Management

• Risk for an Online Broker
• - Lapses on the part of staff.
• - Lapses from Business Associates/ Clients.
• - Lapses in Compliance

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Risk Management

• Risk for an Online Trader
• - Contingent Liabilities
• - Losses due to sudden delisting of
  contracts like Jute.
• - Losses due to big difference between spot
  price and clearing price.
• - Losses due to uncertainty of delivery system
  etc.

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Risk Management

• How one can Manage risk
• - Set Objectives
• - Identify Risk
• - Evaluate Risk
• -Traders (Beta analysis)
• - Elimination of Risk through Hedging
• - Implement appropriate Risk Management
  technique.
• - Review

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Risk Management

• Useful Risk Management Techniques
• - Risk Avoidance
• - Loss Control
• - Risk Retention
• - Risk Transfer

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Risk Management

• Risk Management for Exchanges
• - Settlement guarantee fund
• - Management of Collateral
• - Commodity clearing corporation
• - Bulk handling vehicles to have all state VAT
  and sales tax registration.
• - Elimination of bill up to final delivery.

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Risk Management

• Risk Management for Exchanges
• - Higher and Lower Caps - cooling period.
• - Change in Margin policies.
• - Proper Warehousing
• - Validity period of commodities
• - Status of dealer in Commodities market.

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Role of cross Arbitrage in checking volatility
and settlement blues

• Product bought from one exchange can be delivered
  to another exchange.
• Contract specification relating to quality,
  deliverable units, timing etc. should be the
  same.

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Role of cross Arbitrage in checking volatility
and settlement blues

• Methodology
• Sell at higher prices
• Buy at lower prices
• So that Equilibrium is achieved, which is
  beneficial to Actual users , Traders and Brokers.

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Risk Management

• Effects on Exchanges
• Business will flow and inefficient exchange
  (where volume is low and impact cost is high)
  will also get the share in the overall volume of
  the market.
• If no cross Arbitrage opportunity is available,
  one contract for one product will become market
  leader and will set the bench marking.

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Risk Management

• Role of Day traders in volatility
• Adds to Liquidity
• Adds to Volume
• Low Impact cost
• Polarization leads to high volatility

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Risk Management

• - Net Position
• 500 D 500 J
• 600 D 500 J
• 800 J 100 D
• 900 J 200 D
• 200 J 600 J -
• 900 J Delivery 1100 400
• 100 J Jobbing 1900 2600
• ____ 100 D
• 3000 3000
• Delivery More --- Increase in prices
  (jamming up)
• Delivery - more --- decrease in prices
  (jamming down)

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Thank You