Location basis risk
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Risk management - commodity risk.
Location basis risk arises from differences in commodity prices in different physical locations.
- Location basis risk - local disruption
- "Unlike currency, which can be transferred and stored electronically, commodities must be physically transported and safely held in a storage facility. This introduces the issue of location basis risk when hedging commodities. It is important to understand what price index best matches the price of the commodity in the location where it will be used.
- For example, the price of natural gas to be used in a product in Chicago is likely to be based on the NGI Chicago Citygate natural gas price rather than the NYMEX Henry Hub price. While both price indices will normally closely correlate over time, a local disruption in one market can result in a large spike in price with very little movement in the other market. These locational variances are not observed in currency prices."
- Commodity hedging programmes: what treasurers need to know - The Treasurer online - 11 November 2022.
