I've been reading Craig Pirrongs Economics of Trading Firms published by Trafigura:
Very informative read. The point I have yet to understand is, how is flat price risk actually calculated? My understanding is that the flat price risk is hedged using future contracts and other derivative contracts. Questioning my fundamental assumption that risk and return are directly linked, my question becomes what advantages are born if flat price risk had to be taken on, and hedging with derivatives is not an option? The context of my question being I'm trying to understand the risks measurement and management in physical commodity trades which are exclusively back to back (buyer and seller both exist) and positions and future contracts are not allowed. Are there alternative methods of hedging flat price risk that do not involve future contracts?