Some of the primary risks associated with commodity based loans and the way we minimize it is given below:
1. Market Price Risks
All our loans are collateralized by the underlying commodites for which the trade is being done. Commodity prices are just like any other financial instrument and can have varying degrees of volatility. The usual factors which affect the commodity prices are supply factors (such as crop yields, weather, infestation etc); demand factors (GDP growth) and policy factors (such as international trading treaties, import taxes etc). The value of our collateral will fluctuate with the underlying commodity prices and there might be a scenario that in the case of a default, the collateral value is not sufficient to cover the capital+interest promised to the investor. We cover for this risk by using the following measures:
2. Counterparty Risks
A trade is complete when the Seller succesfully delivers the agreed commodities, the buyer accepts the goods and an invoice is generated by the seller for the buyer to make payment. if any of the counterparty fails to fulfil their obligation, we have a counterparty risks. The usual reason for a seller to default is if he is able to deliver his goods to someone else at a much higher price than what has been agreed with the counterparty. The reverse is true for the buyer, they may default (not take delivery of goods), if they are able to source goods from someone else at a much lower price.
We minimize the counterparty risks by the following means:
3. Operational Risks
International commodity trading comprises of complex logistical operations and things can go haywire at times. The most important criteria in managing the operational risk is to have real time end to end visibiltiy on the supply chain so that preventive measures can be taken before things go wrong. At Satoshi Systems we use the following means to manage the operational risks on the physical trades for which we arrange finance: