Ctfs buy and sell commodities, so are focused on margins price differentials not on flat price levels. Third, although commodity trading firms engage in various economic transformations, they. International trading houses whether in oil, metals or soft commodities. The economics of commodity trading firms demystifies the commodity trading business through a combination of description and analysis. 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. The economics of commodity trading firms trafigura. Physical commodities trading companies are the companies that secure a supply of commodities from endproducers and help to market them across the geographies to a wholesaler or end user. Over the long term, how could the trend toward centralized trading affect the oil and gas and mining industries, and individual companies and markets. The largest trading companies both diversified firms and those concentrating on a single commodity use their financial strength to dominate the industrys. Commodity traders are people or companies who speculate and trade in commodities as diverse as metals and spices. Profiting from commodity trading often requires a combination of market knowledge, luck, and most importantly, strong risk management. Please note that the financials in this complete free business plan are completely. Changing global economic conditions are giving rise to exciting new opportunities, but also hazards. Carley offers practical needtoknow, realworld trading.
The economics of commodity trading firms craig pirrong professor of finance bauer college of business university of houston about the author 2 iv. In recent years, physical energy and commodities trading has entered a new era of sophistication and scale. Commodity trading margins by the numbers the gross margins of oil, natural gas. The industrialization of commodity trading oliver wyman. Free commodities trading firm business plan for raising capital from investors, banks, or grant companies. Commodity trading firms utilize a variety of means to fund their transformation activities. Risk management 11 iii firm structure and ownership a. Indeed, to the extent that commodity trading firms. Risk management is an integral part of the operations of commodity trading firms. The liability structures of commodity trading firms. Otc commodity derivatives trade processing lifecycle events. Commodities trading is one of the oldest forms of economic activity, yet it is also one of the most widely misunderstood. Commodity trading firms 7 ii the risks of commodity trading 8 a. As articulated by professor craig pirrong, commodity trading firms.
However, it takes years to learn the trading business and the ins and outs of each commodity futures contract listed on u. Bp, chevron, exxon mobil, shell, total section chapter 3 b. 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. A futures contractis an agreement to buy or sell a commodity at a date in the future. Different commodity traders use different funding strategies involving. Yet up to now there has been remarkably little research into this important area. 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. The commodity futures and options markets offer plenty of opportunities to profit from price movements. See craig pirrong, the economics of commodity trading firms. You buy or sell through a brokerage firm that transacts the trade for you. Trading firms need to factor in shipment, processing and scaling costs mining majors. Best online brokers for futures trading and commodities. Commodity trading assets reprelending to commodity traders. The economics of commodity trading firms white paper.
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. A traders first book on commodities, first edition this book provides the type of information every trader needs to know and the type of information too many traders had to learn the hard and expensive way. Commodities are an important aspect of most americans daily life. Commodity price risk management a manual of hedging commodity price risk for corporates commodity price risk management a manual of hedging commodity. A the financing of commodity trading firms 31 b the liability structures of commodity trading firms 33 c the ownership of commodity trading firms. The economics of commodity trading firms semantic scholar. Commodity price risk management a manual of hedging commodity price risk for corporates.
Starting a brokerage firm can be a lucrative venture. As commodity markets become more liquid and accessible, commodity. Without them, traders cannot generate enough value to cover their development costs. Some major risks are transferred to the financial markets, through hedging in.
This guide explains the functions and modus operandi of commodities trading firms. Then, the results are monetized across major trader firms expansive global trading portfolios. Futures trading is a complicated business, even for experienced investors, and so is shopping for a brokerage to use for futures and commodities trading. Large trading volumes are essential to ensure returns from advanced analytics. The basics of commodity trading 5 a commodity transformations 5 b value creation in commodity trading 6 c commodity trading firms 8 introduction i. 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. Commodities trading can be hugely profitable, but it can also be extremely confusing. Trading firms can only stay in business as competitive, lowrisk operations section c. 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. Their quality is determined by the risks inherent in holding and collecting. Available balance sheet information also indicates that commodity trading firms do not engage in maturity transformation as do banks.
However, the most success is usually generated through the use of tested trading strategies. The economics of commodity trading firms demystifies the commodity trading. The economics of global commodity trading firms and their. Proprietary trading firms proprietary trading firms, also known as prop shops, profit as a direct result of their. 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. A commodity is a basic good used in commerce that is interchangeable with other goods of the same type. This is an indirect way of trading commodities by owning shares in companies that mine or produce the assets. Different commodity traders use different funding strategies involving different mixes of types of debt and debt. Trading up a look at some current issues facing energy and. March 2014 commodity trading is one of the oldest forms of human activity. 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. Why commodity traders are fleeing the business bloomberg. Agents of transformation commodity trading firms specialize in making transformations in space, time, and form as such, they are focused on price relationships spreads.
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