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  • 10.2.3-RISK AND THE RELATION TO TRADE CREDIT-VOLUME LIMIT

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  • Volume limit

     
     

    Exporters deal with physical coffee. Unless they have easy access to a suitable futures market, they will always be directly exposed to physical or position risk. And that risk has to be managed by limiting or mitigating it. Any operation, large or small, should establish its exact position at least at the close of business every day.

    The daily position report will show total stocks, forward purchases, and sales awaiting execution, concluding with an overall long or short position.

    At first glance it seems safe to assume that by imposing a volume limit, a maximum permitted volume or tonnage long or short, one avoids traders going 'overboard' and possibly putting the firm at risk.

    In reality this is not the case. As mentioned above, long or short is the net difference between stocks and sales, but only if both are of the same quality. Therefore, a number of different position reports are required for the full picture to be seen:

    • Tonnage and cost of stocks (including forward purchases) that cannot be offset against existing sales.
    • Tonnage and estimated cost/value of uncovered (open) sales, i.e. sales for which coffee still has to be purchased.
    • Tonnage and cost of stocks (including forward purchases) awaiting allocation against existing contracts, cost of shipments under execution, and total outstanding invoices (receivables).