Risk Management by Commodity Trading Firms: The Case of Trafigura

Basis risk varies with the commodity and over time. Basis tends to be volatile when the inventories are low or when there are transportation bottlenecks. Trafigura manages basis risk using its knowledge of the relationship between the prices of related but different commodities. To the extent that Trafigura speculates, most of it is on basis relationships. And to the extent that basis movements are uncorrelated across different transactions, the risk can be reduced through diversification. Basis movements across commodities may also not be highly correlated.