Finance and Risk Management
The biggest risk a person can take is to do nothing! The essence of risk management lies in maximizing the areas where we have some control over the outcome while minimizing the areas where we have absolutely no control over the outcome.
Producers and consumers of commodities use the futures markets to protect against adverse price moves. A producer of a commodity is at risk of prices moving lower. Conversely, a consumer of a commodity is at risk of prices moving higher. Therefore, hedging is the process of protecting against financial loss. Futures exchanges like Singapore Exchange (SGX) and Tokyo Commodity Exchange (TOCOM) offer contracts on commodities. These contracts offer producers and consumers alike a mechanism, a futures contract, with which to hedge future production or consumption. Futures contracts trade for different time periods, therefore, producers and consumers can choose hedges that closely reflect their individual risks.
Additionally, futures contracts are liquid instruments. Aside from producers and consumers, speculators, traders, investors and other market participants utilize these markets. The exchanges also offer clearing, which means that the clearinghouse becomes the transaction partner of a trade. This removes credit risk.
Producers or consumers of commodities, who do not wish to assume the risk of price fluctuations, can reduce their total risk by hedging their cash positions in the futures markets. We actively trade rubber in future exchange platforms such as SGX and TOCOM to protect our customers against adverse price moves.