How to minimize risk in commodity futures market

What is the best way to minimise risk in the commodity futures market? The answer: hedge in commodity market.

The investment advise comes from Chiragra Chakrabarty, head of training, Research and Development, Multi Commodity Exchange.

Talking during the India Investment Show organised by myiris.com in association with ICICI Direct, Chakrabarty said the commodity market has huge volatility and uncertainty.

Elaborating the risk exposure and risk management, he pointed out that there are different reasons as to why investors do not use the commodity futures market. "This market has huge volatility and uncertainty," he said.

He said that the risk management can be done through a four step procedure:

identify risk, measure risk, minimize risk and evaluate the risk.

Chakrabarty explained how commodity prices are effecting commodity stock prices.

According to him, Indian companies can hedge through domestic markets and commodity prices as they have correlation with global prices. These companies can also hedge currency fluctuation through domestic exchanges.

"Investors should add commodity in their portfolio as hedging tools," he said explaining through examples how sharp ratio rise could be by diversifying portfolio through investing in commodities.

"The commodity future can be used to remove commodity price risk from commodity company stock," Chakrabarty added.