CA-12.1.4
Past version: Effective from 01 Apr 2008 to 31 Mar 2011
To view other versions open the versions tab on the right
For spot or physical trading, the directional risk arising from a change in the spot price is the most important risk. However, banks applying portfolio strategies involving forward and derivative contracts are exposed to a variety of additional risks, which may well be larger than the risk of a change in spot prices (directional risk). These include:
(a) 'basis risk', i.e., the risk that the relationship between the prices of similar commodities alters through time;
(b) 'interest rate risk', i.e., the risk of a change in the cost of carry for forward positions and options; and
(c) 'forward gap risk', i.e., the risk that the forward price may change for reasons other than a change in interest rates.
Apr 08