Introduction to Commodity Markets

With the increased volatility we experienced over the last 3 years (oil went from $10/bbl to 137 then back to 70, copper went to $4000/t before peaking at $8000/t) there is a natural increase in demand for risk management products and most importantly training on all the intricacies of hedging these risks.What is more, many companies with exposure to commodities are quite (if not very familiar) with these exposures as they are either a) pure commodities players or; b) have had these for a long time.

What is lacking (and hence the purpose of this course) is some training on how to hedge these risks in the derivative over-the-counter (OTC) markets. What do I mean? With the advent of futures (and the marketing push led by the major exchanges) there is a fair amount of material out there on how to hedge commodity risk with futures, and most exchanges even run basic courses on how to hedge with futures (aka their products). For example, the London Metals Exchange runs (fairly expensive) courses on risk management for metals. There isn’t though (not that I have seen anyway) any good, comprehensive course on how to hedge these risks in the OTC market that goes beyond the basic stuff “this is a forward, this is a swap, this is an option, etc.”.

Seven years into my career helping corporates hedge their commodity price risk OTC (which funnily enough is where most of the volume is traded, NOT futures) I am getting an increasing number of questions from clients on how these function and if I (or anyone else) can provide some training on them. Many financial institutions will sell and structure you the product, but very few will teach you how they work beyond the very basics that you need to purchase their product. Those who are not in the sector (i.e. not banks and major commodity trading houses) that have a similar level of sophistication, have had to spend many years learning this stuff “here and there.” There isn’t a course that can teach you all this in one go as there would be for interest rates or FX for examples.

So this is what motivates this course. A programme that in a few hours can give you a hands-on view of derivatives risk management in the commodities world. There will be some theory, but just the bare minimum required to understand the drivers of the product. Most of it will be a hand-on practitioners’ view of how to hedge price risk in the real world.

Let me introduce myself. After a degree in business administration and finance I traded exotic commodity derivatives for a major investment bank in London. I then moved onto to pursue a masters in mathematics and finance before going back to the banking world this time in a more sales and structuring client-facing role helping corporates (mostly in Europe and Asia) manage their commodity price risk. As the risk management and derivatives world becomes more and more complex (despite the reduced risk appetite due to the fall-out of CDOs) I firmly believe that the more quantitative ones’ background the better placed one will be to manage financial risks. At the moment I lead the commodities risk management effort for Southern Europe on behalf of a major European investment bank.

What topics will I be covering? The field is vast and time is precious. I suggest starting with the following:

Oil markets Base metal markets Counterparty risk implications

I am sure more topics will come up down the line but these are the ones where I am getting the most demand at the moment. Hope this helps. Happy reading!

By: Agustin Valecillos

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