Commodity trading and risk management wiki
A CTA generally acts as an asset manager , following a set of investment strategies utilizing futures contracts and options on futures contracts on a wide variety of physical goods such as agricultural products, forest products, metals, and energy, plus derivative contracts on financial instruments such as indices, bonds, and currencies.
There are three major styles of investment employed by CTAs: Technical traders invest after analysing chart patterns. They often employ partially automated systems, such as computer software programs, to follow price trends , perform technical analysis , and execute trades. Successful trend following , or using technical analysis techniques to capture swings in markets may drive a CTA's performance and activity to a large degree.
Galen Burghardt, adjunct professor at the University of Chicago's Booth School of Business , found a correlation of 0. Other non-trend following CTAs include short-term traders , spread trading and individual market specialists. Quantitative CTA's do statistical or quantitative analysis on market price patterns and try to make predictions based on such research. A CTA is often compensated through management fees calculated as a percentage of equity in the fund and profit incentive fees calculated as a percentage of new trading profits.
Usually no incentive fees are charged if the CTA does not generate a profit exceeding a hurdle rate or high-water mark. In the United States, trading of futures contracts for agricultural commodities dates back to at least the s. In , this law was replaced by an amended version named the Commodity Exchange Act. Later, trading expanded significantly following the introduction of derivatives on other products including financial instruments.
In July , the definition of commodity trading advisor under the Commodity Exchange Act was expanded by the Dodd-Frank Wall Street Reform and Consumer Protection Act to include "persons who provide advice on swap transactions". Prior to this, swaps were not included in the CTA definition. In , the CFTC adopted the first comprehensive regulation for commodity trading advisors, which was later strengthened by additional rules in and Under the Commodity Exchange Act , CTAs must register with and conform to the regulations of the CFTC, including providing records and reports, unless they meet the Commission's criteria for exemption.
Under the Commodity Exchange Act qualifying individuals may be exempted from CTA registration with the CFTC, including if their primary business is not as a CTA, they are registered with the Securities and Exchange Commission as an investment advisor, and if they have not provided trading advice to more than 15 persons.
If an individual is exempt from registration, they must still file with the NFA. Nonetheless, exempt CTAs are still regulated in some form. They additionally need to file a public notice disclosing their existence and exempt status. They must provide an offering memorandum to their investors, as well as a quarterly account statement and an annual report.
These reports are used for market surveillance as well as for investigations or litigation cases. The CFTC also increased disclosure requirements and amended the registration criteria. If a commodity trading advisor engages in significant advisory activities regarding securities, it could be required to register under the Investment Advisers Act of Advisers Act. However, most commodity trading advisors are able to rely on an exemption from registration set forth in Section b 6 of the Advisers Act.
This exemption is available to registered commodity trading advisors whose business does not consist primarily of acting as an investment adviser.
From Wikipedia, the free encyclopedia. Betting against your team or political candidate, for example, may signal to you that you are not as committed to them as you thought you were. Hedging can be used in many different ways including foreign exchange trading. The stock example above is a "classic" sort of hedge, known in the industry as a pairs trade due to the trading on a pair of related securities. As investors became more sophisticated, along with the mathematical tools used to calculate values known as models , the types of hedges have increased greatly.
Examples of hedging include: A hedging strategy usually refers to the general risk management policy of a financially and physically trading firm how to minimize their risks. As the term hedging indicates, this risk mitigation is usually done by using financial instruments , but a hedging strategy as used by commodity traders like large energy companies, is usually referring to a business model including both financial and physical deals.
In order to show the difference between these strategies, let us consider the fictional company BlackIsGreen Ltd trading coal by buying this commodity at the wholesale market and selling it to households mostly in winter.
Back-to-back B2B is a strategy where any open position is immediately closed, e. If BlackIsGreen decides to have a B2B-strategy, they would buy the exact amount of coal at the very moment when the household customer comes into their shop and signs the contract. This strategy minimizes many commodity risks , but has the drawback that it has a large volume and liquidity risk , as BlackIsGreen does not know how whether it can find enough coal on the wholesale market to fulfill the need of the households.
Tracker hedging is a pre-purchase approach, where the open position is decreased the closer the maturity date comes. If BlackIsGreen knows that most of the consumers demand coal in winter to heat their house.
A strategy driven by a tracker would now mean that BlackIsGreen buys e. The closer the winter comes, the better are the weather forecasts and therefore the estimate, how much coal will be demanded by the households in the coming winter. A certain hedging corridor around the pre-defined tracker-curve is allowed and fraction of the open positions decreases as the maturity date comes closer.
Delta-hedging mitigates the financial risk of an option by hedging against price changes in its underlying. It is called like that as Delta is the first derivative of the option's value with respect to the underlying instrument 's price.
This is performed in practice by buying a derivative with an inverse price movement. It is also a type of market neutral strategy. Only if BlackIsGreen chooses to perform delta-hedging as strategy, actual financial instruments come into play for hedging in the usual, stricter meaning. Risk reversal means simultaneously buying a call option and selling a put option. This has the effect of simulating being long on a stock or commodity position. Many hedges do not involve exotic financial instruments or derivatives such as the married put.
A natural hedge is an investment that reduces the undesired risk by matching cash flows i. For example, an exporter to the United States faces a risk of changes in the value of the U. Another example is a company that opens a subsidiary in another country and borrows in the foreign currency to finance its operations, even though the foreign interest rate may be more expensive than in its home country: Similarly, an oil producer may expect to receive its revenues in U. One common means of hedging against risk is the purchase of insurance to protect against financial loss due to accidental property damage or loss, personal injury, or loss of life.
There are varying types of financial risk that can be protected against with a hedge. Those types of risks include:. Equity in a portfolio can be hedged by taking an opposite position in futures.
To protect your stock picking against systematic market risk , futures are shorted when equity is purchased, or long futures when stock is shorted. One way to hedge is the market neutral approach.
In this approach, an equivalent dollar amount in the stock trade is taken in futures — for example, by buying 10, GBP worth of Vodafone and shorting 10, worth of FTSE futures the index in which Vodafone trades. Another way to hedge is the beta neutral. Beta is the historical correlation between a stock and an index. Futures contracts and forward contracts are means of hedging against the risk of adverse market movements. These originally developed out of commodity markets in the 19th century, but over the last fifty years a large global market developed in products to hedge financial market risk.
Investors who primarily trade in futures may hedge their futures against synthetic futures. A synthetic in this case is a synthetic future comprising a call and a put position. Long synthetic futures means long call and short put at the same expiry price. To hedge against a long futures trade a short position in synthetics can be established, and vice versa.
Stack hedging is a strategy which involves buying various futures contracts that are concentrated in nearby delivery months to increase the liquidity position. It is generally used by investors to ensure the surety of their earnings for a longer period of time. A contract for difference CFD is a two-way hedge or swap contract that allows the seller and purchaser to fix the price of a volatile commodity. Consider a deal between an electricity producer and an electricity retailer, both of whom trade through an electricity market pool.
Conversely, the retailer pays the difference to the producer if the pool price is lower than the agreed upon contractual strike price. However, the party who pays the difference is " out of the money " because without the hedge they would have received the benefit of the pool price. From Wikipedia, the free encyclopedia. For other uses, see Hedge disambiguation.
For the surname, see Hedger surname. This article needs additional citations for verification. Please help improve this article by adding citations to reliable sources.
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