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 4
Contents......Page 10
Foreword by Nassim Nicholas Taleb......Page 14
Preface......Page 18
Acknowledgements......Page 22
1.1 The importance of commodity spot trading......Page 24
1.2 Forward and Futures contracts......Page 27
1.3 The actors in Futures markets......Page 29
1.4 The structure of Futures markets......Page 32
1.5 Shipping and freight: Spot and forward markets......Page 39
1.6 Volume, liquidity and open interest in Futures markets......Page 42
2.1 Price discovery in Futures markets......Page 46
2.2 Theory of storage, inventory and convenience yield......Page 47
2.3 Scarcity, reserves and price volatility......Page 51
2.4 Futures prices and expectations of future spot prices......Page 54
2.5 Spot–forward relationship in commodity markets under no-arbitrage......Page 58
2.6 Price of a Futures contract and market value of a Futures position......Page 62
2.7 Relationship between forward and Futures prices......Page 65
2.8 The benefits of indexes in commodity markets......Page 68
3.1 Randomness and commodity prices......Page 72
3.2 The distribution of commodity prices and their first four moments......Page 75
3.3 The geometric Brownian motion as a central model in finance......Page 83
3.4 Mean-reversion in financial modeling: From interest rates to commodities......Page 87
3.5 Introducing stochastic volatility and jumps in price trajectories......Page 91
3.6 State variable models for commodity prices......Page 92
3.7 Commodity forward curve dynamics......Page 94
4.1 General definitions......Page 98
4.2 Classical strategies involving European calls and puts......Page 101
4.3 Put–call parity......Page 104
4.4 Valuation of European calls: The Black–Scholes formula and the Greeks......Page 106
4.5 Merton (1973) formula and its application to options on commodity spot prices......Page 113
4.6 Options on commodity spot prices......Page 115
4.7 Options on commodity Futures and the Black (1976) formula......Page 116
5.1 Second proof of the Black–Scholes–Merton formula......Page 118
5.2 Risk-neutral dynamics of commodity prices......Page 121
5.3 Commodity Futures dynamics under the pricing measure......Page 122
5.4 Implied volatility in equity options and leverage effect......Page 124
5.5 Implied volatility in energy option prices and inverse leverage effect......Page 128
5.6 Binomial trees and option pricing......Page 132
5.7 Introducing stochastic interest rates in the valuation of commodity options......Page 140
6.1 Monte Carlo methods for European options......Page 146
6.2 Asian (arithmetic average) options as key instruments in commodity markets......Page 150
6.4 Barrier options......Page 158
6.5 Commodity quanto options......Page 161
7.1 Introduction......Page 166
7.2 The grain markets......Page 167
7.3 Soft commodities: Coffee, cotton and sugar......Page 176
7.4 Citrus and orange juice......Page 181
7.5 Livestock markets......Page 183
7.6 Technical analysis in agricultural commodity markets......Page 184
8.2 About metals......Page 192
8.3 Overview of metal markets and their operation......Page 194
8.4 Characterizing general price movements......Page 198
8.5 Characterizing metal price movements......Page 199
8.6 Conclusion......Page 223
9.1 Why oil is traded and its relationship with worldwide energy prices......Page 224
9.2 Crude oil markets......Page 226
9.3 Refined products markets......Page 240
9.4 Conclusion......Page 247
10.1 The world gas outlook......Page 250
10.2 The gas-producing countries......Page 254
10.3 Gas spot markets......Page 256
10.4 Natural gas Futures and options......Page 263
10.5 The growing interest in LNG......Page 269
11.1 Introduction......Page 274
11.2 Structure of the electricity industry: From vertically integrated utilities to unbundling and restructured oligopolies......Page 275
11.3 Spot power markets and issues in market design......Page 277
11.4 The adjustment market and reserves capacity......Page 289
11.5 Electricity derivatives markets......Page 292
11.6 Modeling electricity spot prices: From mean-reversion and jump-diffusion to jump-reversion......Page 299
12.1 Commodity swap and swaptions......Page 306
12.2 Exchange options......Page 309
12.3 Commodity spread options......Page 310
12.4 Options involving optimal strategies: American, swing and take-or-pay contracts......Page 317
12.5 Discounted cash flows versus real options for the valuation of physical assets: The example of a fuel-fired plant......Page 321
12.6 Valuation of a gas storage facility......Page 327
13.1 The coal market......Page 332
13.2 Emissions......Page 343
13.3 Weather and commodity markets......Page 348
14.1 Introduction......Page 356
14.2 The different ways of investing in commodities......Page 359
14.3 Commodity indexes and commodity-related funds......Page 362
14.4 Conclusion......Page 380
Appendix: Glossary......Page 382
References......Page 398
Index......Page 404
