Risk management

Volatility is a measure of how much a commodity’s price “swings” up and down. It describes the bumpiness of the ride.
High Volatility: Prices change rapidly and dramatically, like a rollercoaster. This creates uncertainty for budgets, margins, and cash flows.
Low Volatility: Market movements are subdued and prices stay relatively stable.

It calculates historical volatility by looking at past price data (e.g., the last 100 days) to see how “bumpy” that period was. In the software, you can measure annualized volatility for up to 20 symbols over a period you choose. This number then serves as a key input to the Value-at-Risk (VaR) simulation. The volatility calculator calculates start date to end date volatility.

: It follows a simple, two-step mathematical process:
Standard Deviation: The tool measures daily price changes (returns) over a set period, such as 90 days. It then calculates the standard deviation of those returns to measure how much a typical day’s return deviates from the average.
Annualization: To compare different assets, daily volatility is converted to an annual figure using the square root of time formula:

Annual \ Volatility = (Daily \ Standard \ Deviation) \times \sqrt{252}, weekly sqrt (52), monthly sqrt (12) and monthly average (sqrt 12 – for CFaR)
(Note: 252 represents the approximate number of trading days in a year).

Correlation measures how different commodity prices move in relation to each other. It is expressed as a coefficient between -1 and +1:
+1 (Positive Correlation): Commodities move in lock-step; when one goes up, the other tends to follow.
-1 (Negative Correlation): Commodities move in perfectly opposite directions, which is ideal for hedging.
0 (No Correlation): The price movements are random and unrelated.

It identifies how your selected commodities move together. This helps identify concentration risk (having too many assets moving the same way) and highlights diversification opportunities where combining assets might reduce overall risk.

VaR is a single number that quantifies potential downside. It answers: “What is the maximum expected loss for my exposure over a specific time, given a certain level of certainty?” Fastmarkets basis VaR off a notional value instead of mark-to-market, to allow the user flexibility in creating a VaR value or a Cashflow at Risk (CFaR) value.
Example: A 1-day, 99% VaR of $37,180 means there is only a 1% chance that your portfolio will lose more than $37,180 in the next day.

It is the “engine” of the VaR calculation.  The system runs thousands of simulated price paths based on your inputs to forecast potential risk exposure. It’s like rolling the dice thousands of times to see every possible market outcome instead of just guessing once.

The first step is Selecting Symbols. You can search and pick up to 20 Fastmarkets prices—such as different grades of aluminum or copper—to create a tailored view of your actual business exposure.

The software offers flexibility based on your expertise:
VaR Calculator – Auto: You pick symbols and weights; the system automatically computes volatility and correlations from history to estimate VaR.
VaR Calculator – Manual: You enter your own volatility and correlation figures to run custom “what-if” scenarios or stress tests.

Yes, significantly.
Short-Term (e.g., 1-day view): Shows immediate tactical risk.
Longer-Term (e.g., 20-day view): Shows how risk builds over longer periods, approximately one month.
The Risk: Using long-term “calm” data during a sudden geopolitical shock will cause the model to underestimate your current risk.

Correlation identifies the concentration of your prices. The correlation calculator tells you why your risk is so high, suggesting you may need to add offsetting commodities or derivatives to balance the portfolio and increase diversification.

Instead of being surprised by market swings, you quantify them. By understanding your “measurable number” of risk, you can stabilize production planning, protect margins, and make smarter hedging decisions than competitors who are only guessing.

VaR acts as a “Risk Alarm.” If the VaR simulation indicates a potential loss exceeding your risk appetite, it is a clear signal to hedge further. By looking at diversification results, you can see whether adding a specific, negatively correlated asset effectively brings the VaR back down to a comfortable level.

Any team exposed to raw-material volatility:
Procurement: To secure materials at predictable costs.
Treasury: To manage liquidity and forecast volatile cash flows.
Risk Management: To ensure that the company is functioning within risk limits

Yes. For a Treasurer, understanding price risk is directly tied to understanding cash flow volatility. By inputting your “notional value” (price multiplied by quantity), the VaR simulation estimates the potential hit to your actual cash reserves. You can change the weights from positive to negative to reflect revenues and costs.