Segmenting Supply Chain Risk Using E/CTRM Systems: Unifying Theory of Commodity Hedging and Arbitrage

51 Pages Posted: 6 Aug 2012

Date Written: August 5, 2012

Abstract

The complexity of managing physical and financial risk throughout the commodity production, processing and merchandising chain presents numerous challenges. To solve this problem commercials are increasingly turning to Energy and Commodity Transaction Risk Management (E/CTRM) systems. Still, risk management functionality within these systems is reported as falling short of requirements. Our discussion, in response, provides an economic framework for developing commodity risk policy and evaluation tools. In doing so, we unify the theory of normal backwardation with theory of storage, macroeconomic general equilibrium with multiple equilibria and microeconomic agents, basis trading with arbitrage strategies, and the hedging response function with elastic/inelastic supply-demand economics. After establishing axioms and rules of inference, we investigate the agribusiness supply chain to help illustrate application.

Keywords: Agribusiness, Arbitrage, Backwardation, Basis Risk, Contango, Cost-of-Carry, Equilibrium, Expectations Theory, Hedging Pressure, Multiple Equilibria, No-Arbitrage Bounds, Supply Chain, Term Structure, Theory of Storage

JEL Classification: D82, D84, E12, G13, L92, O13, Q11, Q12, Q13, Q14, Q15, Q16

Suggested Citation

Frankfurter, Michael Mack, Segmenting Supply Chain Risk Using E/CTRM Systems: Unifying Theory of Commodity Hedging and Arbitrage (August 5, 2012). Available at SSRN: https://ssrn.com/abstract=2124559 or http://dx.doi.org/10.2139/ssrn.2124559

Michael Mack Frankfurter (Contact Author)

IQ3 Solutions Group ( email )

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Beverly Hills, CA 90210
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