Handbook of Multi-Commodity Markets and Products
Structuring, Trading and Risk Management
Wiley Finance Series
1. Edition March 2015
1064 Pages, Hardcover
Professional Book
Short Description
The Handbook of Multi-Commodity Markets and Products is the definitive desktop reference for traders, structurers, and risk managers who wish to become acquainted with the structure, function, rules, and practices across a wide spectrum of commodity markets. Contributions from a global team of renowned industry experts provide real-world examples for each market, along with tools for analyzing, pricing, and risk managing deals. The discussion focuses on convergence, including arbitrage valuation, econometric modeling, market structure analysis, contract engineering, and risk, while simulated scenarios help readers understand practical applications.
* Structure and manage both simple and sophisticated multi-commodity deals
* Exploit pay-off profiles and trading strategies with a diversified set of commodity prices
* Develop more accurate forecasting models by considering additional metrics
* Price energy products and other commodities in segmented markets with an eye toward specific structural features
Handbook of Multi-Commodity Markets and Products offers a deeper understanding and more effective application.
The comprehensive guide to working more effectively within the multi-commodity market.
The Handbook of Multi-Commodity Markets and Products is the definitive desktop reference for traders, structurers, and risk managers who wish to broaden their knowledge base. This non-technical yet sophisticated manual covers everything the professional needs to become acquainted with the structure, function, rules, and practices across a wide spectrum of commodity markets. Contributions from a global team of renowned industry experts provide real-world examples for each market, along with tools for analyzing, pricing, and risk managing deals. The discussion focuses on convergence, including arbitrage valuation, econometric modeling, market structure analysis, contract engineering, and risk, while simulated scenarios help readers understand the practical application of the methods and models presented.
Gradual deregulation and the resulting increase in diversity and activity have driven the evolution of the traditionally segmented market toward integration, raising important questions about opportunity identification and analysis in multi-commodity deals. This book helps professionals navigate the shift, providing in-depth information and practical advice.
* Structure and manage both simple and sophisticated multi-commodity deals
* Exploit pay-off profiles and trading strategies with a diversified set of commodity prices
* Develop more accurate forecasting models by considering additional metrics
* Price energy products and other commodities in segmented markets with an eye toward specific structural features
As one of the only markets strong enough to boom during the credit crunch, the commodities markets are growing rapidly. Combined with increasing convergence, this transition presents potentially valuable opportunities for the development of a robust multi-commodity portfolio. For the professional seeking deeper understanding and a more effective strategy, the Handbook of Multi-Commodity Markets and Products offers complete information and expert guidance.
Acknowledgements xxiii
About the Editors xxv
List of Contributors xxvii
PART ONE Commodity Markets and Products
CHAPTER 1 Oil Markets and Products 3
Cristiano Campi and Francesco Galdenzi
1.1 Introduction 3
1.2 Risk Management for Corporations: Hedging Using Derivative Instruments 4
1.2.1 Crude Oil and Oil Products Risk Management for Corporations 4
1.3 Oil Physical Market Hedging and Trading 41
Further Reading 66
CHAPTER 2 Coal Markets and Products 67
Lars Schernikau
2.1 Introduction 67
2.2 Source of Coal - Synopsis of the Resource Coal 72
2.3 Use of Coal - Power Generation and More 90
2.4 Overview of Worldwide Steam Coal Supply and Demand 102
2.5 The Global Steam Coal Trade Market and its Future 121
2.6 Concluding Words 129
Abbreviations and Definitions 130
Acknowledgements 132
References 132
CHAPTER 3 Natural Gas Markets and Products 135
Mark Cummins and Bernard Murphy
3.1 Physical Natural Gas Markets 135
3.2 Natural Gas Contracting and Pricing 154
3.3 Financial Natural Gas Markets 158
References 180
CHAPTER 4 Electricity Markets and Products 181
Stefano Fiorenzani, Bernard Murphy and Mark Cummins
4.1 Market Structure and Price Components 181
4.2 Renewables, Intra-Day Trading and Capacity Markets 205
4.3 Risk Measures for Power Portfolios 216
References 221
Further Reading 221
CHAPTER 5 Emissions Markets and Products 223
Marc Chesney, Luca Taschini and Jonathan Gheyssens
5.1 Introduction 223
5.2 Climate Change and the Economics of Externalities 224
5.3 The Kyoto Protocol 227
5.4 The EU ETS 232
5.5 Regional Markets: A Fragmented Landscape 239
5.6 A New Asset Class: CO2 Emission Permits 241
Abbreviations 252
References 252
CHAPTER 6 Weather Risk and Weather Derivatives 255
Alessandro Mauro
6.1 Introduction 255
6.2 Identification of Volumetric Risk 257
6.3 Atmospheric Temperature and Natural Gas Market 264
6.4 Modification of Weather Risk Exposure with Weather Derivatives 272
6.5 Conclusions 276
Nomenclature 277
References 277
CHAPTER 7 Industrial Metals Markets and Products 279
Alessandro Porru
7.1 General Overview 279
7.2 Forward Curves 305
7.3 Volatility 337
Acknowledgements 352
References 353
Further Reading 353
CHAPTER 8 Freight Markets and Products 355
Manolis G. Kavussanos, Ilias D. Visvikis and Dimitris N. Dimitrakopoulos
8.1 Introduction 355
8.2 Business Risks in Shipping 356
8.3 Freight Rate Derivatives 366
8.4 Pricing, Hedging and Freight Rate Risk Measurement 382
8.5 Other Derivatives for the Shipping Industry 393
8.6 Conclusion 396
Acknowledgements 396
References 397
CHAPTER 9 Agricultural and Soft Markets 399
Francis Declerk
9.1 Introduction: Stakes and Objectives 399
9.2 Agricultural Commodity Specificity and Futures Markets 400
9.3 Demand and Supply, Price Determinants and Dynamics 409
9.4 Hedging and Basis Management 466
9.5 The Financialization of Agricultural Markets and Hunger: Speculation and Regulation 480
9.6 Conclusion about Hedging and Futures Contracts 493
References 495
Further Reading 496
Glossary, Quotations and Policy on Websites 497
CHAPTER 10 Foreign Exchange Markets and Products 499
Antonio Castagna
10.1 The FX Market 499
10.2 Pricing Models for FX Options 509
10.3 The Volatility Surface 511
10.4 Barrier Options 512
10.5 Sources of FX Risk Exposure 513
10.6 Hedging FX Exposures Embedded in Energy and Commodity Contracts 517
10.7 Typical Hedging Structures for FX Risk Exposure 533
References 553
PART TWO Quantitative Topics
CHAPTER 11 An Introduction to Stochastic Calculus with Matlab(r) Examples 557
Laura Ballotta and Gianluca Fusai
11.1 Brownian Motion 558
11.2 The Stochastic Integral and Stochastic Differential Equations 566
11.3 Introducing It^o's Formula 575
11.4 Important SDEs 581
11.5 Stochastic Processes with Jumps 618
References 633
Further Reading 633
CHAPTER 12 Estimating Commodity Term Structure Volatilities 635
Andrea Roncoroni, Rachid Id Brik and Mark Cummins
12.1 Introduction 635
12.2 Model Estimation Using the Kalman Filter 635
12.3 Principal Components Analysis 646
12.4 Conclusion 655
Appendix 655
References 657
CHAPTER 13 Nonparametric Estimation of Energy and Commodity Price Processes 659
Gianna Figà-Talamanca and Andrea Roncoroni
13.1 Introduction 659
13.2 Estimation Method 660
13.3 Empirical Results 663
References 672
CHAPTER 14 How to Build Electricity Forward Curves 673
Ruggero Caldana, Gianluca Fusai and Andrea Roncoroni
14.1 Introduction 673
14.2 Review of the Literature 674
14.3 Electricity Forward Contracts 675
14.4 Smoothing Forward Price Curves 677
14.5 An Illustrative Example: Daily Forward Curve 679
14.6 Conclusion 684
References 684
CHAPTER 15 GARCH Models for Commodity Markets 687
Eduardo Rossi and Filippo Spazzini
15.1 Introduction 687
15.2 The GARCH Model: General Definition 690
15.3 The IGARCH(p,q) Model 699
15.4 A Permanent and Transitory Component Model of Volatility 700
15.5 Asymmetric Models 702
15.6 Periodic GARCH 707
15.7 Nesting Models 708
15.8 Long-Memory GARCH Models 713
15.9 Estimation 720
15.10 Inference 722
15.11 Multivariate GARCH 725
15.12 Empirical Applications 727
15.13 Software 740
References 748
CHAPTER 16 Pricing Commodity Swaps with Counterparty Credit Risk: The Case of Credit Value Adjustment 755
Marina Marena, Gianluca Fusai and Chiara Quaglini
16.1 Introduction 755
16.2 Company Energy Policy 756
16.3 A Focus on Commodity Swap Contracts 758
16.4 Modelling the Dynamics of Oil Spot Prices and the Forward Curve 760
16.5 An Empirical Application 764
16.6 Measuring Counterparty Risk 777
16.7 Sensitivity Analysis 788
16.8 Accounting for Derivatives and Credit Value Adjustments 788
16.9 Conclusions 797
References 798
Further Reading 798
CHAPTER 17 Pricing Energy Spread Options 801
Fred Espen Benth and Hanna Zdanowicz
17.1 Spread Options in Energy Markets 801
17.2 Pricing of Spread Options with Zero Strike 805
17.3 Issues of hedging 813
17.4 Pricing of Spread Options with Nonzero Strike 815
Acknowledgement 824
References 825
CHAPTER 18 Asian Options: Payoffs and Pricing Models 827
Gianluca Fusai, Marina Marena and Giovanni Longo
18.1 Payoff Structures 832
18.2 Pricing Asian Options in the Lognormal Setting 833
18.3 A Comparison 856
18.4 The Flexible Square-Root Model 858
18.5 Conclusions 874
References 874
CHAPTER 19 Natural Gas Storage Modelling 877
Álvaro Cartea, James Cheeseman and Sebastian Jaimungal
19.1 Introduction 877
19.2 A Simple Model of Storage, Futures Prices, Spot Prices And Convenience Yield 878
19.3 Valuation of Gas Storage 880
References 899
CHAPTER 20 Commodity-Linked Arbitrage Strategies and Portfolio Management 901
Viviana Fanelli
20.1 Commodity-Linked Arbitrage Strategies 902
20.2 Portfolio Optimization with Commodities 921
Symbols 936
References 936
CHAPTER 21 Econometric Analysis of Energy and Commodity Markets: Multiple Hypothesis Testing Techniques 939
Mark Cummins
21.1 Introduction 939
21.2 Multiple Hypothesis Testing 940
21.3 Energy-Emissions Market Interactions 943
21.4 Emissions Market Interactions 953
21.5 Quantitative Spread Trading in Oil Markets 956
References 964
APPENDIX
A Quick Review of Distributions Relevant in Finance with Matlab(r) Examples 967
Laura Ballotta and Gianluca Fusai
Index
GIANLUCA FUSAI is Full Professor in Financial Mathematics at the University of Eastern Piedmont, Italy, and a PT Reader in Mathematical Finance at Cass Business School, City University of London, UK. He holds a PhD in Finance from Warwick Business School, an MSc in Statistics and Operational Research from the University of Essex and a BSc in Economics from Bocconi University. His research interests focus on Energy Markets, Financial Engineering, Numerical Methods for Finance, Quantitative Risk Management. He has published extensively on these topics in top-tier international reviews. Gianluca has also co-authored the best-selling textbook Implementing Models in Quantitative Finance. Gianluca has cooperated to several projects in energy markets including a multi-energy risk assessment tool developed in conjunction with a pool of energy and industrial companies and a forward curve builder for the power and gas markets nowadays used for trading and marking to market. He has also been a consultant for private and public sector on building pricing tools of derivative products. Gianluca has been an expert witness in several derivative disputes.
MARK CUMMINS is Senior Lecturer in Finance at the Dublin City University Business School and holds a PhD in Quantitative Finance. Mark's research interests include a broad range of energy and commodity modelling, derivatives, risk management and trading topics. Mark has published in international journals such as Energy Economics, Applied Energy and the Journal of Energy Markets, as well as mainstream finance journals such as the Journal of Financial Markets, International Review of Financial Analysis and Quantitative Finance. Mark has previous industry experience working as a Quantitative Analyst within the Global Risk function for BP Oil International Ltd. As part of the Risk Quantitative Analysis team, primary responsibilities included derivatives and price curve model validation and development, with a global remit across BP's energy and commodity activities. Mark is engaged in ongoing industry training and consultancy activities, focused on the energy sector primarily.
