Different commodity traders use different funding strategies involving different mixes of types of debt and debt. Trading firms can only stay in business as competitive, lowrisk operations section c. Commodity trading firms 7 ii the risks of commodity trading 8 a. Ctfs buy and sell commodities, so are focused on margins price differentials not on flat price levels. The economics of commodity trading firms demystifies the commodity trading. Commodities trading is one of the oldest forms of economic activity, yet it is also one of the most widely misunderstood.
Our agricultural contracts include grains and oilseeds like corn, soybeans, and soybean oil as well as other products including livestock, dairy, lumber, coffee, and more. Trading up a look at some current issues facing energy and. 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. The economics of commodity trading firms craig pirrong professor of finance bauer college of business university of houston about the author 2 iv. Their quality is determined by the risks inherent in holding and collecting. Please note that the financials in this complete free business plan are completely. Otc commodity derivatives trade processing lifecycle events an isda whitepaper april 2012 this whitepaper provides a summary of key trade processing lifecycle events in the overthecounter otc commodity. The economics of global commodity trading firms and their. Agents of transformation commodity trading firms specialize in making transformations in space, time, and form as such, they are focused on price relationships spreads. Many etfs exchangetraded funds grant exposure to commodities via investments in commodity futures, options on such futures, or shares in companies that mine or produce commodities. Some major risks are transferred to the financial markets, through hedging in. The economics of commodity trading firms trafigura.
The commodity futures and options markets offer plenty of opportunities to profit from price movements. Indeed, to the extent that commodity trading firms. Starting a brokerage firm can be a lucrative venture. Changing global economic conditions are giving rise to exciting new opportunities, but also hazards. Trading firms need to factor in shipment, processing and scaling costs mining majors. Risk management is an integral part of the operations of commodity trading firms. Private 34 d commodity trading firms as financial intermediaries 36 v commodity firm asset ownership and vertical integration 40 a the physical asset intensity of commodity trading firms. Commodities are an important aspect of most americans daily life.
This online brokerage firm provides traders with access to forex and cfd trading on bonds, stocks, treasuries, indices, etfs, commodities, and cryptocurrencies. Over the long term, how could the trend toward centralized trading affect the oil and gas and mining industries, and individual companies and markets. However, the most success is usually generated through the use of tested trading strategies. However, it takes years to learn the trading business and the ins and outs of each commodity futures contract listed on u. Otc commodity derivatives trade processing lifecycle events. The largest trading companies both diversified firms and those concentrating on a single commodity use their financial strength to dominate the industrys. March 2014 commodity trading is one of the oldest forms of human activity.
The basics of commodity trading 5 a commodity transformations 5 b value creation in commodity trading 6 c commodity trading firms 8 introduction i. Best online brokers for futures trading and commodities. Why commodity traders are fleeing the business bloomberg. Commodity trading assets reprelending to commodity traders. Profiting from commodity trading often requires a combination of market knowledge, luck, and most importantly, strong risk management. Commodity trading firms have expanded their services, starting as simple middlemen responsible for furnishing trades, to taking on the extraction, processing, shipping and refining of commodities. Available balance sheet information also indicates that commodity trading firms do not engage in maturity transformation as do banks. Firm registration commodity trading advisor cta a commodity trading advisor cta is an individual or organization that, for compensation or profit, advises others, directly or indirectly, as to the value of or the advisability of buying or selling futures contracts, commodity. The economics of commodity trading firms semantic scholar. Different commodity traders use different funding strategies involving. The industrialization of commodity trading oliver wyman. Basis is the difference between the local cash price of a commodity and the price of a specific futures contract of the same commodity at any given point in time. As articulated by professor craig pirrong, commodity trading firms.
Futures trading is a complicated business, even for experienced investors, and so is shopping for a brokerage to use for futures and commodities trading. 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 commodity is a basic good used in commerce that is interchangeable with other goods of the same type. This guide explains the functions and modus operandi of commodities trading firms. In recent years, physical energy and commodities trading has entered a new era of sophistication and scale. The economics of commodity trading firms white paper.
See craig pirrong, the economics of commodity trading firms. Free commodities trading firm business plan for raising capital from investors, banks, or grant companies. Yet up to now there has been remarkably little research into this important area. Trading firms like trafigura systematically eliminate their flat price exposure the risk of a change in the benchmark price for a barrel of oil or a tonne of copper. Third, although commodity trading firms engage in various economic transformations, they.
International trading houses whether in oil, metals or soft commodities. Carley offers practical needtoknow, realworld trading. This is an indirect way of trading commodities by owning shares in companies that mine or produce the assets. Commodity trading firms utilize a variety of means to fund their transformation activities. Commodity traders are people or companies who speculate and trade in commodities as diverse as metals and spices. As commodity markets become more liquid and accessible, commodity. Bp, chevron, exxon mobil, shell, total section chapter 3 b. The liability structures of commodity trading firms. Risk management 11 iii firm structure and ownership a. Then, the results are monetized across major trader firms expansive global trading portfolios. Proprietary trading firms proprietary trading firms, also known as prop shops, profit as a direct result of their. Commodities trading can be hugely profitable, but it can also be extremely confusing. Large trading volumes are essential to ensure returns from advanced analytics.
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