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Books for FRM Part 1 Exam

The Financial Risk Manager (FRM) Exam is a rigorous exam and  tests your knowledge on four topics: Foundations of Risk Management Quantitative Analysis Financial Markets and Products Valuation and Risk Models For each of these topics, GARP prescribes reading material which is essentially a collection of chapters taken from different books. To prepare for FRM

Cross Hedging Commodities

There are cases where it is not possible to find futures contracts on a particular underlying in order to hedge the exposure to the commodity. In this case futures on the nearest underlying will be used to perform the hedge and this process is known as cross-hedging. Some of the reasons there are problems in

Define and Compute a Commodity Spread

A spread position is one where trading takes places on many contracts on the same or related commodity. If the price between two related commodities changes then the idea is to profit from the opportunity. There are two main types of commodity spreads Inter-commodity spread – In this case a position is taken in two

Strip Hedge and Stack Hedge in Commodities Market

The concept of hedging in commodities markets is the same as in the financial markets and that is to mitigate the exposure to price movements due to the commodities positions. The most common instruments that are used for hedging purposes are futures contracts as they are highly liquid instruments. Futures contracts are the most popular

Equilibrium Formula for Pricing Commodity Forwards

The forward price of a commodity is calculated much along the lines of that of a financial product except for the fact that by virtue of its physical form and characteristics a commodity incurs different types of storage and holding costs as compared to a financial product and the factors that affect the commodities forward

Carry Markets and Forward Prices

A commodity is said to be in carry when it is being stored rather than traded. The concept is similar to financial markets where this term is called the financial cost of carry. In the case of commodities this becomes more obvious since the process of producing and distributing them involves storing them as well.

Basis Risk in Commodities Hedging

The concept of basis risk in the commodities markets is similar to basis risk in financial products.  It occurs when spot price and the futures price do not converge when the futures contract expires. This happens in two situations. In the first case the risk associated with a commodity price exposure cannot be entirely hedged

Factors Affecting Commodity Market Prices

Cash prices are derived from the futures markets by removing the effect of the cost of carrying the commodity i.e. by stripping out the financial cost of carry price. The driving factors behind the volatility in the prices of the commodities’ cash prices arises because they have different characteristics than financial products. Factors that affect

Basic Commodity Terminology

Market Characteristics Commodities have specific features that distinguish them from financial instruments. Financial markets do not have supply side constraints, i.e., their availability in the markets is not restricted by any factors other than the characteristics of the assets they are comprised of and participants who are associated with them like exchanges, governments, traders, etc. 

Yield Curve Risk

We know that the bond prices are sensitive to changes in interest rates. When interest rates increase, the bond prices fall and vice versa. A bond’s maturity also influences its price sensitivity to interest rate changes. When we are looking at a single bond, measuring the interest rate risk (sensitivity) is relatively easier because we