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In economics and finance, arbitrage is the practice of taking advantage of a difference in prices in two or more markets – striking a combination of matching deals to capitalise on the difference, the profit being the difference between the market prices at which the unit is traded. When used by academics, an arbitrage is a transaction that involves no negative cash flow at any probabilistic or temporal state and a positive cash flow in at least one state; in simple terms, it is the possibility of a risk-free profit after transaction costs. For example, an arbitrage opportunity is present when there is the possibility to instantaneously buy something for a low price and sell it for a higher price.
In finance, a futures contract is a standardized legal contract to buy or sell something at a predetermined price for delivery at a specified time in the future, between parties not yet known to each other. The asset transacted is usually a commodity or financial instrument. The predetermined price of the contract is known as the forward price or delivery price. The specified time in the future when delivery and payment occur is known as the delivery date. Because it derives its value from the value of the underlying asset, a futures contract is a derivative.
Market risk is the risk of losses in positions arising from movements in market variables like prices and volatility. There is no unique classification as each classification may refer to different aspects of market risk. Nevertheless, the most commonly used types of market risk are:
A hedge is an investment position intended to offset potential losses or gains that may be incurred by a companion investment. A hedge can be constructed from many types of financial instruments, including stocks, exchange-traded funds, insurance, forward contracts, swaps, options, gambles, many types of over-the-counter and derivative products, and futures contracts.
Financial risk management is the practice of protecting economic value in a firm by managing exposure to financial risk - principally operational risk, credit risk and market risk, with more specific variants as listed aside. As for risk management more generally, financial risk management requires identifying the sources of risk, measuring these, and crafting plans to address them. See Finance § Risk management for an overview.
Financial risk is any of various types of risk associated with financing, including financial transactions that include company loans in risk of default. Often it is understood to include only downside risk, meaning the potential for financial loss and uncertainty about its extent.
In finance, an asset class is a group of financial instruments that have similar financial characteristics and behave similarly in the marketplace. We can often break these instruments into those having to do with real assets and those having to do with financial assets. Often, assets within the same asset class are subject to the same laws and regulations; however, this is not always true. For instance, futures on an asset are often considered part of the same asset class as the underlying instrument but are subject to different regulations than the underlying instrument.
An energy derivative is a derivative contract based on an underlying energy asset, such as natural gas, crude oil, or electricity. Energy derivatives are exotic derivatives and include exchange-traded contracts such as futures and options, and over-the-counter derivatives such as forwards, swaps and options. Major players in the energy derivative markets include major trading houses, oil companies, utilities, and financial institutions.
In finance, risk factors are the building blocks of investing, that help explain the systematic returns in equity market, and the possibility of losing money in investments or business adventures. A risk factor is a concept in finance theory such as the capital asset pricing model, arbitrage pricing theory and other theories that use pricing kernels. In these models, the rate of return of an asset is a random variable whose realization in any time period is a linear combination of other random variables plus a disturbance term or white noise. In practice, a linear combination of observed factors included in a linear asset pricing model proxy for a linear combination of unobserved risk factors if financial market efficiency is assumed. In the Intertemporal CAPM, non-market factors proxy for changes in the investment opportunity set.
Foreign exchange risk is a financial risk that exists when a financial transaction is denominated in a currency other than the domestic currency of the company. The exchange risk arises when there is a risk of an unfavourable change in exchange rate between the domestic currency and the denominated currency before the date when the transaction is completed.
Currency overlay is a financial trading strategy or method conducted by specialist firms who manage the currency exposures of large clients, typically institutions such as pension funds, endowments and corporate entities. Typically the institution will have a pre-existing exposure to foreign currencies, and will be seeking to:
Commodity risk refers to the uncertainties of future market values and of the size of the future income, caused by the fluctuation in the prices of commodities. These commodities may be grains, metals, gas, electricity etc. A commodity enterprise needs to deal with the following kinds of risks:
The following outline is provided as an overview of and topical guide to finance:
Hedge accounting is an accountancy practice, the aim of which is to provide an offset to the mark-to-market movement of the derivative in the profit and loss account.
Efficient energy use, sometimes simply called energy efficiency, is the process of reducing the amount of energy required to provide products and services. For example, insulating a building allows it to use less heating and cooling energy to achieve and maintain a thermal comfort. Installing light-emitting diode bulbs, fluorescent lighting, or natural skylight windows reduces the amount of energy required to attain the same level of illumination compared to using traditional incandescent light bulbs. Improvements in energy efficiency are generally achieved by adopting a more efficient technology or production process or by application of commonly accepted methods to reduce energy losses.
Fuel hedging is a contractual tool some large fuel consuming companies, such as airlines, cruise lines and trucking companies, use to reduce their exposure to volatile and potentially rising fuel costs. A fuel hedge contract is a futures contract that allows a fuel-consuming company to establish a fixed or capped cost, via a commodity swap or option. The companies enter into hedging contracts to mitigate their exposure to future fuel prices that may be higher than current prices and/or to establish a known fuel cost for budgeting purposes. If such a company buys a fuel swap and the price of fuel declines, the company will effectively be forced to pay an above-market rate for fuel. If the company buys a fuel call option and the price of fuel increases, the company will receive a return on the option that offsets their actual cost of fuel. If the company buys a fuel call option, which requires an upfront premium cost, much like insurance, and the price of fuel decreases, the company will not receive a return on the option but they will benefit from buying fuel at the then-lower cost.
In finance, model risk is the risk of loss resulting from using insufficiently accurate models to make decisions, originally and frequently in the context of valuing financial securities. However, model risk is more and more prevalent in activities other than financial securities valuation, such as assigning consumer credit scores, real-time probability prediction of fraudulent credit card transactions, and computing the probability of air flight passenger being a terrorist. Rebonato in 2002 defines model risk as "the risk of occurrence of a significant difference between the mark-to-model value of a complex and/or illiquid instrument, and the price at which the same instrument is revealed to have traded in the market".
In trading strategy, news analysis refers to the measurement of the various qualitative and quantitative attributes of textual news stories. Some of these attributes are: sentiment, relevance, and novelty. Expressing news stories as numbers and metadata permits the manipulation of everyday information in a mathematical and statistical way. This data is often used in financial markets as part of a trading strategy or by businesses to judge market sentiment and make better business decisions.
Fossil Fuel Beta (FFß) measures the percent change in excess (market-adjusted) stock returns for every 1 percent increase in fossil fuel prices. For example, if a company has an FFß of –0.20, then a 1 percent increase in fossil fuel prices should produce, on average, a 0.2% decline in the firm's stock price over and above the impact arising from fossil fuel price swing on the stock market as a whole.
United Shipping & Trading Company (USTC) is a family-owned global group of companies headquartered in Middelfart, Denmark. USTC holds a portfolio of activities that includes oil & energy, shipping & logistics, ship owning, risk management, car activities, IT, sustainable energy, and environment & recycling. The USTC Group is represented by more than 140 own offices in 40 countries and has more than 4,000 employees (2022). The largest company in the group is Bunker Holding, the world's leading company in bunker trading and the parent company of several autonomous bunker fuel companies around the world. Other USTC companies are SDK FREJA, Uni-Tankers, Selected Car Group, Unit IT and CM Biomass, among others.
References
- Crockford, Neil (1986). An Introduction to Risk Management (2 ed.). Woodhead-Faulkner. ISBN 0-85941-332-2.