Commodity Derivatives: Markets and Applications
Neil C. Schofield
Format: PDF / Kindle (mobi) / ePub
In Commodity Derivatives: Markets and Applications, Neil Schofield provides a complete and accessible reference for anyone working in, or studying commodity markets and their associated derivatives. Dealing primarily with over the counter structures, the book provides extensive coverage of both hard and soft commodities, including gold, crude oil, electricity, plastics, emissions and agriculturals.
Using structures unique to the individual market, each chapter includes an explanation of the commodity and an analysis of its physical market, discussion on the typical patterns of demand and supply and the main factors that will influence the price of the commodity, and the main products.
Each chapter focuses on how the products could be used along the physical supply chain and seeks to identify the main market risks and how they can be hedged. The book then brings into perspective how the structuring banks hedge their own resultant exposure and examines the attraction of OTC investment structures for the wholesale market.
Commodity Derivatives: Markets and Applications is essential reading for those wishing to learn about the main features of the commodity markets, the mechanics of derivatives, and how they are applied.
mathematician’s tool to try to describe a market behaviour they never witness in traditional ﬁnancial products such as bonds and equities and so cannot explain it; in reality no one in the real world uses the convenience yield. An article in Risk (November 2006) described it as the ﬂow of services and beneﬁts that accrues to an owner of a physical commodity, but not to an owner of a contract for future delivery of the commodity. This can come in the form of having a secure supply of raw materials
client base around the world. He has also worked in a training capacity for Chase Manhattan bank from 1988 to 1997. The author was appointed as a visiting fellow at ICMA Centre, Reading University, England in April 2007. 1 An Introduction to Derivative Products SYNOPSIS The purpose of this chapter is to outline the main features of derivatives and provide a description of the main ways in which they are priced and valued. This chapter is divided into two distinct sections that cover: • The key
monitoring activity within the ring will determine the “ofﬁcial” closing prices for the cash, 3- and 15-month maturities. This ofﬁcial ﬁxing allows the market to establish a transparent benchmark against which trades can be settled. For example, for aluminium the ring trading times are: First session 1st ring 2nd ring (ofﬁcial) Kerb trading 11:55 to 12.00 12.55 to 13.00 13.15 to 14.45 Second session 3rd ring 4th ring Kerb trading 15.15 to 15.20 15.55 to 16.00 16.15 to 17.00 Kerb sessions run
this, it should be noted that there are standardised forms of physical contracts in the OTC market, particularly in the forward market. The latter are typically traded up to 3 months in advance, hence there is a certain degree of overlap between the cash forwards price curve and the futures price curve. For example, the following hypothetical prices quoted in early March of a particular year would be representative of a typical term structure: Dated Brent USD 65.01 Brent Forwards Brent (April)
market share. • For some end users there is an element of substitutability between different fuel sources, so relative pricing becomes important. • Since oil-based products are mature liquid markets, they provide an attractive relative pricing source in geographical locations where natural gas markets are considered illiquid. This was particularly relevant when banks were lending to large exploration and production projects. In order to ensure there were sufﬁcient cashﬂows to service the debt,