Risk management

Q: How is historical volatility calculated?

: 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).

Q: How do I start a risk assessment in the software?

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.

Q: What is the difference between "Auto" and "Manual" VaR settings?

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.

Q: Does the time period I choose for volatility matter?

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.

Question 1

What is volatility?

Answer

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.

Question 2

What does the volatility calculator do?

Answer

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.

Question 3

How is historical volatility calculated?

Answer

: 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).

Question 4

What is correlation?

Answer

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.

Question 5

What does the correlation calculator do?

Answer

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.

Question 6

What is Value at Risk (VaR)?

Answer

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.

Question 7

What is a "Monte Carlo simulation"?

Answer

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.

Question 8

How do I start a risk assessment in the software?

Answer

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.

Question 9

What is the difference between "Auto" and "Manual" VaR settings?

Answer

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.

Question 10

Does the time period I choose for volatility matter?

Answer

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.

Question 11

Why should I use the correlation calculator if I already have VaR?

Answer

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.

Question 12

How do these tools turn volatility into a "strategic advantage"?

Answer

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.

Question 13

How does VaR help a Treasurer or Risk Manager decide to hedge?

Answer

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.

Question 14

Who in an organization should use these tools?

Answer

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

Question 15

Can I use these tools for non-financial "Cashflow at Risk"?

Answer

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.

Risk management

Turn commodity volatility into budget certainty.

Corporate treasury and finance

Instant risk results:

Hedge verification

Financial stability:

Audit readiness:

Capital planning:

Risk managers

Strategic alignment:

Real-time monitoring:

Reporting compliance:

System integration:

Strategic procurement

Budget certainty:

Quote validation

Cost transparency:

Alternative hedging

Smart sourcing

Margin compression from price volatility

Unsustainable and manual risk modelling

Unquantifiable hedge effectiveness

Cost barriers to enterprise systems

Our solution: Enterprise-grade analytics without enterprise complexity

Independent and trusted data

Comprehensive coverage

Actionable intelligence

Get started  with us today

Section 1: The Basic Tools

Section 2: Using the tools in the software

Section 3: Strategic Aplication

Risk management

Turn commodity volatility into budget certainty.

Corporate treasury and finance

Instant risk results:

Hedge verification

Financial stability:

Audit readiness:

Capital planning:

Risk managers

Strategic alignment:

Real-time monitoring:

Reporting compliance:

System integration:

Strategic procurement

Budget certainty:

Quote validation

Cost transparency:

Alternative hedging

Smart sourcing

Margin compression from price volatility

Unsustainable and manual risk modelling

Unquantifiable hedge effectiveness

Cost barriers to enterprise systems

Our solution: Enterprise-grade analytics without enterprise complexity

Independent and trusted data

Comprehensive coverage

Actionable intelligence

Get started with us today

Section 1: The Basic Tools

Section 2: Using the tools in the software

Section 3: Strategic Aplication

Get started  with us today