ABSTRACT
Developing a framework for adequately identifying and managing the range of commodity risks confronting the non-financial corporation is not possible. There is too much variation across the types of commodity risk encountered by the various commodity producing and consuming firms that a general framework is unhelpful at best, and could be misleading. Some method of simplifying the process is needed. One possible method is to restrict the types of risk encountered: “Risk management is the practice of defining the risk level a firm desires, identifying the risk level a firm currently has, and using derivatives or other financial instruments to adjust the actual level of risk to the desired level of risk” (Chance 1998, p.672). In this approach, risk management is closely identified with the types of instruments that can be used to manage risk. Jorion (2000, p.3) takes a similar tack: “Risk management is the process by which various risk exposures are identified, measured and controlled. Our understanding of risk has been much improved by the development of derivatives markets.”
