In additional to the commodity-specific risks, which of the following risks represent the main commodity derivative risks?

In additional to the commodity-specific risks, which of the following risks represent the main commodity derivative risks?

I. Basis

II. Term

III. Correlation

IV. Seasonality
A . I, II
B . II, III
C . I, IV
D . I, II, III, IV

View Answer

Answer: D

Explanation:

Commodity derivative risks encompass a variety of factors, and among the main risks are:

Basis Risk: This arises from the difference between the spot price of the commodity and the futures price of the commodity.

Term Risk: This refers to the risk associated with the time to maturity of the derivative contract.

Correlation Risk: This involves the risk that the price of the commodity does not move in correlation with the derivative being used to hedge.

Seasonality Risk: This arises from the predictable fluctuations in commodity prices due to seasonal patterns.

All these risks are essential in understanding the complete risk profile associated with commodity derivatives.

References Information verified based on the financial risk and regulation context provided in the book "How Finance Works"??.