The last few years have been a watershed for the commodities, cash and derivatives industry. New regulations and products have led to an explosion in the commodities markets, creating a new asset for investors that includes hedge funds as well as University endowments, and has resulted in a spectacular growth in spot and derivative trading.This book covers hard and soft commodities (energy, agriculture and metals) and analyses:Economic and geopolitical issues in commodities marketsCommodity price and volume riskStochastic modelling of commodity spot prices and forward curvesReal options valuation and hedging of physical assets in the energy industryIt is required reading for energy companies and utilities practitioners, commodity cash and derivatives traders in investment banks, the Agrifood business, Commodity Trading Advisors (CTAs) and Hedge Funds.In Commodities and Commodity Derivatives, H?lyette Geman shows her powerful command of the subject by combining a rigorous development of its mathematical modelling with a compact institutional presentation of the arcane characteristics of commodities that makes the complex analysis of commodities derivative securities accessible to both the academic and practitioner who wants a deep foundation and a breadth of different market applications. It is destined to be a "must have" on the subject.”—Robert Merton, Professor, Harvard Business School"A marvelously comprehensive book of interest to academics and practitioners alike, by one of the world's foremost experts in the field."—Oldrich Vasicek, founder, KMV
Author(s): Helyette Geman
Edition: 1
Year: 2005
Language: English
Pages: 416
Commodities and Commodity Derivatives......Page 3
Contents......Page 9
Foreword by Nassim Nicholas Taleb......Page 13
Preface......Page 17
Acknowledgements......Page 21
1.1 The importance of commodity spot trading......Page 23
1.2 Forward and Futures contracts......Page 26
1.3 The actors in Futures markets......Page 28
1.4 The structure of Futures markets......Page 31
1.5 Shipping and freight: Spot and forward markets......Page 38
1.6 Volume, liquidity and open interest in Futures markets......Page 41
2.1 Price discovery in Futures markets......Page 45
2.2 Theory of storage, inventory and convenience yield......Page 46
2.3 Scarcity, reserves and price volatility......Page 50
2.4 Futures prices and expectations of future spot prices......Page 53
2.5 Spot–forward relationship in commodity markets under no-arbitrage......Page 57
2.6 Price of a Futures contract and market value of a Futures position......Page 61
2.7 Relationship between forward and Futures prices......Page 64
2.8 The benefits of indexes in commodity markets......Page 67
3.1 Randomness and commodity prices......Page 71
3.2 The distribution of commodity prices and their first four moments......Page 74
3.3 The geometric Brownian motion as a central model in finance......Page 82
3.4 Mean-reversion in financial modeling: From interest rates to commodities......Page 86
3.5 Introducing stochastic volatility and jumps in price trajectories......Page 90
3.6 State variable models for commodity prices......Page 91
3.7 Commodity forward curve dynamics......Page 93
4.1 General definitions......Page 97
4.2 Classical strategies involving European calls and puts......Page 100
4.3 Put–call parity......Page 103
4.4 Valuation of European calls: The Black–Scholes formula and the Greeks......Page 105
4.5 Merton (1973) formula and its application to options on commodity spot prices......Page 112
4.6 Options on commodity spot prices......Page 114
4.7 Options on commodity Futures and the Black (1976) formula......Page 115
5.1 Second proof of the Black–Scholes–Merton formula......Page 117
5.2 Risk-neutral dynamics of commodity prices......Page 120
5.3 Commodity Futures dynamics under the pricing measure......Page 121
5.4 Implied volatility in equity options and leverage effect......Page 123
5.5 Implied volatility in energy option prices and inverse leverage effect......Page 127
5.6 Binomial trees and option pricing......Page 131
5.7 Introducing stochastic interest rates in the valuation of commodity options......Page 139
6.1 Monte Carlo methods for European options......Page 145
6.2 Asian (arithmetic average) options as key instruments in commodity markets......Page 149
6.4 Barrier options......Page 157
6.5 Commodity quanto options......Page 160
7.1 Introduction......Page 165
7.2 The grain markets......Page 166
7.3 Soft commodities: Coffee, cotton and sugar......Page 175
7.4 Citrus and orange juice......Page 180
7.5 Livestock markets......Page 182
7.6 Technical analysis in agricultural commodity markets......Page 183
8.2 About metals......Page 191
8.3 Overview of metal markets and their operation......Page 193
8.4 Characterizing general price movements......Page 197
8.5 Characterizing metal price movements......Page 198
8.6 Conclusion......Page 222
9.1 Why oil is traded and its relationship with worldwide energy prices......Page 223
9.2 Crude oil markets......Page 225
9.3 Refined products markets......Page 239
9.4 Conclusion......Page 246
10.1 The world gas outlook......Page 249
10.2 The gas-producing countries......Page 253
10.3 Gas spot markets......Page 255
10.4 Natural gas Futures and options......Page 262
10.5 The growing interest in LNG......Page 268
11.1 Introduction......Page 273
11.2 Structure of the electricity industry: From vertically integrated utilities to unbundling and restructured oligopolies......Page 274
11.3 Spot power markets and issues in market design......Page 276
11.4 The adjustment market and reserves capacity......Page 288
11.5 Electricity derivatives markets......Page 291
11.6 Modeling electricity spot prices: From mean-reversion and jump-diffusion to jump-reversion......Page 298
12.1 Commodity swap and swaptions......Page 305
12.2 Exchange options......Page 308
12.3 Commodity spread options......Page 309
12.4 Options involving optimal strategies: American, swing and take-or-pay contracts......Page 316
12.5 Discounted cash flows versus real options for the valuation of physical assets: The example of a fuel-fired plant......Page 320
12.6 Valuation of a gas storage facility......Page 326
13.1 The coal market......Page 331
13.2 Emissions......Page 342
13.3 Weather and commodity markets......Page 347
14.1 Introduction......Page 355
14.2 The different ways of investing in commodities......Page 358
14.3 Commodity indexes and commodity-related funds......Page 361
14.4 Conclusion......Page 379
Appendix: Glossary......Page 381
References......Page 397
Index......Page 403
