Risk Management

Effective risk management separates successful traders from those who fail. This chapter provides a comprehensive framework for sugar trading risks.

Risk Categories

Category	Examples
Market	Price, FX, interest rate
Credit	Default, settlement
Operational	Execution, docs, quality
Country	Political, regulatory
Liquidity	Funding, market

Price Risk

Types of Exposure

Type	Description
Flat Price	Outright price exposure
Basis	Physical-futures differential
Spread	Inter-month differential
Quality	Grade premium exposure

Measuring Risk

Position Exposure

Position: 25,000 MT @ 21.50 c/lb (unhedged)
Value: 25,000 × $474/MT = $11.85 million

1 c/lb move = 25,000 × $22.05 = $551,250 P&L

Value at Risk (VaR)

Position:    $10 million
Daily Vol:   2%
Confidence:  95%
Z-score:     1.645

Daily VaR = $10M × 2% × 1.645 = $329,000

Price Risk Limits

Limit Type	Example
Net Position	Max 50,000 MT
Gross Position	Max 200,000 MT
VaR	Max $500K daily
Stop Loss	Close at $1M loss

Credit Risk

Exposure Calculation

Phase	Exposure
Pre-Delivery	Replacement cost
Post-Delivery	Full invoice value

Credit Limits

Rating	Single Exposure	Terms
A	$10M	Open 60 days
B	$5M	Open 30 days
C	$2M	CAD or L/C
D	$1M	L/C only
E	$0	Decline

Risk Mitigation

Tool	Protection
L/C at Sight	Bank guarantee
Confirmed L/C	2 bank guarantee
Credit Insurance	85-95% recovery
Prepayment	Full protection
Parent Guarantee	Corporate support

Concentration Risk

Example Portfolio:
Counterparty A: $8M (32%)
Counterparty B: $5M (20%)
Counterparty C: $4M (16%)

Top 3: 68% concentration
Policy: Max 20% single counterparty

Operational Risk

Risk Categories

Category	Examples
Execution	Wrong price, quantity
Documentation	L/C discrepancies
Quality	Spec disputes
Logistics	Vessel delays
Systems	IT failure

Key Controls

Area	Control
Trade Execution	Dual approval
Documentation	Checklist per trade
Logistics	Approved carriers
Systems	Daily backup

KPIs

KPI	Target
Trade Errors	<0.5%
Doc Discrepancies	<10%
Quality Claims	<2%
Settlement On-Time	>98%

Country Risk

Risk Factors

Factor	Examples
Political	Government change
Economic	Inflation, recession
Regulatory	Export bans, tariffs
Legal	Contract enforcement
Transfer	Currency controls

Country Limits

Risk Level	Single Trade	Total
Low	No limit	No limit
Medium	$5M	$15M
Elevated	$2M	$5M
High	$500K	$1M

Liquidity Risk

Types

Type	Description
Funding	Cannot meet cash needs
Market	Cannot exit positions
Asset	Cannot sell inventory

Cash Flow Management

Week 1: Start $5M + Recv $2.5M - Pay $3M = $4.5M
Week 2: Start $4.5M + Recv $1M - Pay $2.5M = $3M
Week 3: Start $3M + Recv $4M - Pay $2M = $5M

Margin Call Risk

Position: Long 500 contracts
Initial Margin: $700,000

Price Move    Variation    Total Margin
-1 c/lb       -$560K       $1.26M
-2 c/lb       -$1.12M      $1.82M
-5 c/lb       -$2.80M      $3.50M

Caution

Ensure credit lines cover worst-case margin requirements.

FX Risk

Exposures

Transaction	Currency
Sugar sales	USD
Brazil purchase	USD or BRL
Operating costs	Local

Hedging Guidelines

Exposure	Hedge
Contracted	100%
Committed	75-100%
Anticipated	50-75%
Budget	0-25%

Risk Limits

Limit Hierarchy

Board Limits (Capital at risk)
    ↓
Management Limits (Total VaR)
    ↓
Desk Limits (Position, VaR)
    ↓
Trader Limits (Individual)

Limit Monitoring

Frequency	Activity
Real-time	Position monitor
Intraday	Limit utilization
Daily	Full risk report
Weekly	Limit review

Breach Protocol

Utilization	Action
<80%	Normal
80-90%	Alert desk head
90-95%	Alert risk manager
95-100%	Reduction plan
>100%	Immediate escalation

Stress Testing

Historical Scenarios

Scenario	Price Move
2011 Rally	+40%
2015 Crash	-40%
2016 El Niño	+100%
COVID Crash	-25% in 2 weeks
2021 Frost	+15% in 1 week

Hypothetical Scenarios

Scenario	Assumptions
Brazil Weather	+30%, basis +50 pts
India Export Ban	+20%, credit stress
Financial Crisis	-30%, defaults

Risk Reporting

Daily Report Contents

DAILY RISK REPORT

Position Summary:
- Net Physical: +25,000 MT
- Net Futures: -25,000 MT
- Net Exposure: 0 (basis only)

Risk Metrics:
- Daily VaR: $185,000
- Stress Loss: $1,200,000

Limit Utilization:
- Net Position: 25% of limit
- VaR: 37% of limit

Alerts:
- Counterparty B at 80% limit

Key Takeaways

1. Know your risks — Identify all categories
2. Measure consistently — VaR, exposure, limits
3. Set appropriate limits — Match risk appetite
4. Monitor continuously — Daily minimum
5. Stress test regularly — Prepare for worst-case
6. Escalate breaches — No exceptions

References

• GARP — Risk education
• BIS Basel — Banking standards
• ISO 31000