How Can Software Help Manage the Risk of Commodity Trading

All commodity trading involves some degree of risk – by its very nature, the commodities market is volatile, with prices shifting rapidly, and the margin between profit and loss difficult to predict. Not having some kind of risk system in place for commodities trading, and particularly when making leveraging and hedging risk against a wider market, can result in investments going sour very quickly; this is especially true for small investment companies that cannot offset risk against their overall portfolio, and have to be very careful about individual trades.

In this context, it’s important for commodity trading to incorporate techniques and strategies that lower risk, or what Oliver Wyman’s Risk Journal defines as ‘comprehensive integrated risk and pricing approaches.’ This approach involves finding ways to simulate prices and track patterns in trades, while also being able to accurately record and process transactions and assets on a real time basis. Using risk management software is one way to help with this challenge.

Risk management software can be used as a system that monitors and predicts trends within and cross your trades; software can be developed to input prices and measurement methods, and can work on different scenarios and potentially risky transactions by collecting data and filtering out higher risk situations. From this basis, it’s possible to have a clearer sense of the risks involved in each trade.

At the same time, risk management software can help with different processes, and can include everything from automating invoices and settlements, through to working around human error; software can similarly produce PaR, VaR, and CFar reports, and can be used to compute credit ratings, while also enabling current investments and collateral to be valued over time.

Perhaps the greatest benefit of using risk management software, however, is being able to track and respond to trends in volatility, which can include historic and implied volatility parameters, and to decide on what counts as a reasonable level of operational risk. Centralisation and simplification of trading processes is key to this approach, as is volume analysis, and reviewing limits on trades.

Applying scenarios to your risk management software can therefore allow for analysis of risk and return on commodities, with forward curve predictions allowing you to make more informed decisions on the kinds of trades that are being made. User friendly software can similarly lay out areas of risk, and can provide an accessible way of automating and simplifying more complex transactions. Tailored software can also be tested and adapted depending on the needs of clients, and for new updates and applications.

When used as part of everyday processes within an investment company, risk management software can provide a platform on which to run a range of different processes; this approach can be particularly enhanced by connecting software to the cloud, whereby traders can access data from different devices and locations without having to give up their security. Taking a cloud based approach can be a good idea if you want to keep traders connected to the market when they’re outside an office.

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