Physical Trading Questions
Dear all,
I'm an intern currently doing Finance for a small physical trading house. It is my interest to slowly work my way up to try to get into a Junior Trader Role once I graduate but I'm quite stuck at the moment about the logic behind back to back trading hence seeking the experienced to hopefully work my brain into it. Please educate me if I am wrong about the terms.
Assuming a trader sold a contract 3000MT that has monthly shipments of 1000MT each for 3 months to USA with price basis US futures/index (Every shipment price is settlement price previous End of Month)
but bought 3000 MT from a Malaysian supplier with price basis Malaysia Futures market over three month shipping period, how does one hedge against risks involving this trade?
My understanding is there are:
1) Currency Exchange Risk - offset by FX hedging
2) Different Futures Market Risk - offset by longing US Futures & shorting equivalent in Malaysian futures
3) Freight Risk - offset by securing freight rates initially
4) Basis Risk - not sure how to offset
Think my understanding of physical trading is still very basic and I feel there are many loopholes in my explanation. Is there any way to make basis trading safer between two different future exchanges?
Comments ( 1 )
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