ABSTRACT
Though much discussion of commodity risk management focuses on market risk, examination of the recent derivative debacles also reveals the importance of operational risk and liquidity risk (see Sec. 1.3). Within this environment, the risk management process is decidedly complex. It is the goal of senior management to have in place “a risk management system that links capital, risk and profit in a way that enhances profitability whilst satisfying the … demands of regulators and the marketplace” (Arthur Andersen 1998). From a corporate perspective, the need for an integrated approach to risk management has been understood for many years. Dowd (1998, p.9) captures the general approach required:
The first point to appreciate is that all sensible approaches [to risk management] have the same first step, i.e. we formulate a corporate risk management philosophy to impose some guidelines on risk management decision-making. This tells us what kinds of risks we wish to bear, what risks we want to avoid, what sort of options we will consider to manage our risks, and so forth. Usually, we will readily bear those risks that we have some particular expertise in handling (e.g. risk unique to our particular line of business), but there will also be other risks that we will usually wish to avoid (e.g. the risk of our factory burning down). This philosophy should also give us some indication of what attitude we should take towards the many other types of risks that we might face—when we should bear them, when we should not bear them and the like.
