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If I am doing a back to back business (i.e., forward selling followed by forward/physical purchase) do I need to have a risk quantification mechanism?

April 26, 2017Business doing followed forward physical purchase Quantification risk Selling

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If I am doing a back to back business (i.e., forward selling followed by forward/physical purchase) do I need to have a risk quantification mechanism?

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Yes, if there is a basis risk involved between the buy and sell side transactions. The basis risk can arise due to differing delivery schedules of the two legs of transactions, or their exposure to different benchmark markets with different volatilities.