Risk Management and Structured Solutions in Commodity Markets

1. Risk Management should:

i) Be Reactive in its approach

ii) Consider only Tangible Assets

iii) Only focus on zero loss policy as risks do not present any business opportunity

iv) Be a focus of the Finance function so that the Business function can focus on profit-making activities

• a. (i) and (ii)

• b. (ii) and (iii)

• c. (iv)

• d.  None of the above

2. Which trade structure(s) is/are useful for a commodity trading company acting as middleman in sourcing and supplying goods and having tight liquidity situation:

i) Transferable LC

ii) Back-to-Back LC

iii) Buying on cash terms, selling on open account credit terms

• a. (i) only

• b. (ii) only

• c. (i) and (ii)

• d. All of the above

3. In an Advance Payment Guarantee/Standby LC used in commodity trades, the Applicant is usually the: 

• a. Importer

• b. Exporter

• c. The Insurance Company

• d. The Importer's Bank

4. Which of the following would usually be applicable in a Tender contract  involving long term supply of agri-commodities: 

 

i) Bid Bond/Guarantee

ii) Performance Bond/Guarantee

iii) Guarantee in lieu of rental deposit for rental of Importer’s office spaces

iv) Advance Payment Guarantee 

• a. (i), (ii) and (iii)

• b. (i), (ii) and (iv)

• c. (i), (iii) and (iv)

• d. (i), (ii), (iii) and (iv)

5. Which of the following are sound Principles in a Risk Management framework: 

 

i) Value Preservation 

ii) Value Creation

iii) Consider only Quantitative parameters

iv)  Take into account qualitative factors such as human, cultural etc

• a. (i) and (ii)

• b. (i), (ii) and (iv)

• c. (i), (ii) and (iii)

• d. (ii), (iii) and (iv)

6. What key factors did the Covid Pandemic highlight to players in Trade in terms of Risk and Risk Management: 

 

i) Having access to adequate and diversified liquidity and working capital solutions including for contingent requirements is critical

ii) Importance of relying on few key suppliers

iii) Providing competitive payment terms to Buyers to capture greater market share

iv) Need for sound Risk Management policies and practices to tide through normal as well as crisis situations

• a. (i) only

• b.  (iv) only

• c. All of the above

• d. (i) and (iv)

7. Select the considerations of the bank when issuing the Back to Back LC on behalf of middlemen engaged in commodity trading: 

 

i) Terms and conditions in both the LCs should match as much as possible

ii) Foreign reserves of the Issuing Bank's country of the "master/mother" LC

iii) Financial strength of the Issuing Bank of the "master/mother" LC

iv) Middleman's experience and expertise in Back-to-Back LC transactions 

• a. (i), (ii) and (iii)

• b. All of the above

• c. (ii) and (iii)

• d. (i), (ii) and (iv) 

8. Which of the following risks can be managed or mitigated in trading activities:

 

i) Counterparty risk

ii) Bank risk of LC Issuing Bank

iii) Sovereign risks associated with country of Importer

iv) Cargo risk 

• a. (i), (ii)  and (iii) only

• b. (ii), (iii) and (iv)

• c. (i), (ii) and (iv) only

• d. All of the above

9. Under a Confirmed Letter of Credit (LC) utilized in commodity trades, which of the following are applicable:

 

(i) A Confirming Bank only pays the Beneficiary when the Applicant pays

(ii) A Confirming Bank only pays the Beneficiary when the Issuing Bank pays

(iii) The Confirmed LC is useful when the Issuing Bank is seen as financially weak

(iv) The Confirmed LC can reduce payment risk arising from political issues in the Issuing Bank's country

• a. (ii) and (iii)

• b. (i) and (iii)

• c. (iii) and (iv) only

• d. (iv) only

10. A trading entity (Exporter) bears entire risk of non-payment by its trading counterpart (Importer) and such risk cannot be mitigated.

• a. True

• b. False