Trading economics does not verify any data and disclaims any obligation to do so. The commodity prices displayed in trading economics are based on overthecounter otc and contract for difference cfd financial instruments. The economics of commodity trading firms craig pirrong professor of finance bauer college of business university of houston ii. The economics of commodity trading firms craig pirrong professor of finance bauer college of business university of houston vi. The claim that speculators are to blame and futures trading should be limited is.
March 2014 commodity trading is one of the oldest forms of human activity. Commodity traders are people or companies who speculate and trade in commodities as diverse as metals and spices. He is a member of the dionysian economics lab laboratoire deconomie dionysien,led. The simple economics of commodity price speculation. Commodity trading firms rely on efficient logistics to transport commodities costeffectively. Financing, ownership structure and provision of funding to customers. Consequently, one measure of net debt total liabilities minus current assets is negative for 8 of the 17 firms.
Flat price is to be distinguished between various price differences relative prices, such as a time spread e. The evolution of inventories and hedging pressures are the two dominant sources of explanation. The risks of commodity trading 2 a risk categories 2 b risk management 7 appendix a 11 source data for international trade flow in commodities introduction i. The job shedding rate accelerated to an alltime high. Case studies and risk management in commodity derivatives. Pairs trading the commodity futures curve subject finance type of the degree m. Manipulation has been a vexing subject in commodity futures markets from the mid19th century. Risk management is an integral part of the operations of commodity trading firms. Commodity derivatives are the commodity futures and commodity swaps that use the price and volatility of price in underlying as the base to change in prices of the derivatives so as to amplify, hedge, or invert the way in which an investor can use them to act on the underlying commodities. And, in 2016 he was named the chs chair in risk management and trading at ndsu which is an endowed position. Commodity traders come in all shapes and sizes, but commodity trading firms can be and often are juggernauts.
The economics of commodity markets attempts to bridge the gap between academics and working professionals by way of a textbook that is both theoretically informative and practical. The simple economics of commodity price speculation mit. Have primers from baml, macquarie, and ms, and also reading hot commodities by jim rogers. Craig pirrong professor of finance bauer college of business university of houston about the author craig pirrong is a professor of finance and the energy markets director for the global energy management institute at the bauer college of business at the university of houston. Forexthe foreign exchange, also abbreviated as fxis a global market that trades in currencies such as dollars, euros, and yen. Commodities, and their related financial products, are traded on exchanges.
The economics of global commodity trading firms and their. A practitioners guide to the markets global financial markets james, tom on. Read pdf the economics of commodity trading firms trafigura the economics of commodity trading firms trafigura when somebody should go to the book stores, search inauguration by shop, shelf by shelf, it is really problematic. The economics of commodity trading firms trafigura. Commodities are standardized products, such as oil, gold, and copper, that are generally used in manufacturing processes around the world.
Applied economics with periodic sabbaticals at stanford university. Enduring proprietary trading firms instead typically. Commodity trading firms bridge gaps between producers and consumers based on these three pillars, through transformations in space, time and form. Where the existing infrastructure is suboptimal, there are. The largest trading companies both diversified firms and those concentrating on a single commodity use their financial strength to dominate the industrys. First, it covers the theories explaining why the futures curve can be upward or downward sloping, an essential element for commodity producing companies. Are commodity trading firms worth the lending and investment risk. Section b how commodity trading works chapter 5 sourcing commodities. The basis is the differential between the price of a physical commodity and its hedging instrument.
Trafigura group, one of the worlds largest independent commodity traders, with a focus on oil and petroleum products and metals and minerals, is at the centre of. While the oil 101 materials were giving a good overview of the entire oil and gas industry, he needed something more focused on commodity trading. The commodity trading room also can be used for targeted industry programs, including those for individual firms, industry organizations and marketing clubs. I was able to find this amazing resource put together by professor craig pirrong from the university of houston for. Private 34 d commodity trading firms as financial intermediaries 36 v commodity firm asset ownership and vertical integration 40. The economics literature has identified several kinds of manipulation, including market power manipulation, tradebased manipulation, and manipulation by fraud. The economics of commodity trading firms white paper. Agents of transformation commodity trading firms specialize in making transformations in space, time, and form as such, they are focused on price relationships spreads rather than flat prices flat prices matter primarily to the the extent that they affect a volumesmargins, and b financing constraints. The commodity trading firms offer brokerage services both for the options and futures markets. Recently, he was named as a university distinguished professor at ndsu which an honorary position is, and a great achievement. Economics of commodities and commodity markets oxford. Dealing commodities is an old profession, dating back further than trading stocks and bonds. Specifically, for all 17 of the commodity trading firms studied, current assets exceed current liabilities. The economics of commodity trading firms semantic scholar.
Commodity markets can include physical trading and derivatives trading using spot prices, forwards, futures, and options on futures. On the price front, input cost inflation slowed to an over sevenandahalf year low due to commodity prices and weak demand for raw materials. This chapter covers the economic fundamentals of commodity markets i. Our market prices are intended to provide you with a reference only, rather than as a basis for making trading decisions.
See craig pirrong, the economics of commodity trading firms, 2014. In this commodities section you may find all the information news, analysis, prices about the most traded commodities such as gold, crude oil, silver, platinum and copper. The economics of commodity trading firms demystifies the commodity trading business through a combination of description and analysis. Commodity trading room comes online at unl agricultural. Farmers have used a simple form of derivative trading in the commodity market for centuries for price risk management. The basics of commodity trading 5 a commodity transformations 5 b value creation in commodity trading 6 c commodity trading firms 8. Yet up to now there has been remarkably little research into this important area.
Basis risk is the risk of a change in this differential. The business model of trading firms like trafigura, vitol, glencore and the likes is to not incur any openunhedged risk, so physical contracts are almost always hedged with either a offsetting physical contracts or b financial derivatives futures, swaps, options, the latter being rarely used or c proxies contracts with similar price dynamics, but not referencing the same physical. Cornhusker economics june 29, 2016commodity trading room comes online at unl commodity markets are central to nebraskas economy. What are the linkages between corruption and commodity trading. A commodity market trades in goods such as coffee, cocoa, and mined products such as gold and oil. Trafigura, one of the worlds leading commodity trading firms, sponsored the study from which this article is excerpted and made senior executives and other staff available to the author. Increased volatility in commodity prices, decreasing margins, extended regulatory and compliance measures and stunted economic growth have put additional pressure on firms to gain a better mastery of their inherent risks, while maintaining. Ctfs buy and sell commodities, so are focused on margins price differentials not on flat price levels. Case studies and risk management in commodity derivatives trading january 2011 hilary till. The difference between forex trading and commodity trading is primarily the products underlying tradable security. The services offered by the commodity brokerage firms are similar to those firms, which operate in the bond, currency, and stock markets. The economics of commodity trading firms craig pirrong professor of finance bauer college of business university of houston about the author 2 iv. Ancient civilizations traded a wide array of commodities. The median ratio of current assets to current liabilities is 1.
A commodity is a basic good used in commerce that is interchangeable with other commodities of the same type. Ndsu to open commodity trading room ndsu news ndsu. Some major risks are transferred to the financial markets, through hedging in. Commodity trading and risk management systems overview. The economist offers authoritative insight and opinion on international news, politics, business, finance, science, technology and the connections between them. Rocked with increased scrutiny, escalating regulation and a barrage of fines and penalties, the commodity trading industry has seen a huge transition from its heyday in early2007 when it was raking in trillions of dollars to present day, in which firms face devalued commodity. The northern crops institute at ndsu will use the room to teach grain importers about grain procurement and risk management.
Based in part on the authors teaching experience of commodity finance at the university paris dauphine, the book covers all important commodity markets topics and. Commodity trading at a strategic crossroad 3 exhibit 1 commoditytrading econo mies are under pressure. The economics of commodity trading firms, craig pirrong, 2014. The study of agricultural marketing concepts, tools and strategies as they relate to risk management for agricultural producers, commodity merchandisers, processors and other traders are essential for students seeking a career in the agribusiness. Why commodity traders are fleeing the business bloomberg.
Commodity trading is one of the oldest forms of human activity. In the next chapter we will learn about the history of commodity market, its evolution and various commodity future exchanges. The recent release of report on economics of commodity trading firms is a bold step from a wellrespected commodity trading firm ctf trafigura, in giving an insight and demystifying the secretive commodity trading industry. A the financing of commodity trading firms 31 b the liability structures of commodity trading firms 33 c the ownership of commodity trading firms. A practitioners guide to the markets global financial markets. In this amazingly exhaustive white paper you will find the following sections on commodity trading fundamentals. According to the financial times, a report commissioned by the global financial markets association, whose members are the worlds largest banks, wanted to gather evidence on why. The purpose of exchanges is to provide a centralized marketplace where commodity producersthe commercialscan sell their commodities to those who want to use them for manufacturing or.
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