By Iain J. Clark
Commodity alternative Pricing: A Practitioner’s Guide covers commodity alternative pricing for quantitative analysts, investors or structurers in banks, hedge cash and commodity buying and selling companies.
Based at the author’s adventure with commodity derivatives, this e-book presents an intensive and mathematical creation to some of the marketplace conventions and versions utilized in commodity choice pricing. It introduces a few of the by-product items quite often traded for commodities and describes how those types should be calibrated and used for pricing and threat administration. The booklet has been built with enter from investors and examples utilizing actual global info, including correct brand new educational research.
The ebook contains functional descriptions of industry conventions and quote codes utilized in commodity markets along normal items visible in dealer costs and utilized in calibration. additionally mentioned are commodity versions and their mathematical derivation and volatility floor modelling for traded commodity derivatives. Gold, silver and different worthy metals are addressed, together with gold ahead and gold hire premiums, in addition to copper, aluminium and different base metals, crude oil and typical fuel, sophisticated strength and electrical energy. There also are sections at the items encountered in commodities resembling crack unfold and spark unfold techniques and substitute commodities resembling carbon emissions, climate derivatives, bandwidth and telecommunications buying and selling, plastics and freight.
Commodity alternative Pricing is perfect for a person operating in commodities or aiming to make the transition into the world, in addition to teachers wanting to familiarize themselves with the conventions of the commodity markets.
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Additional info for Commodity Option Pricing: A Practitioner's Guide
An investor buys a T-futures contract at the market price f0,T . Whereas for the equivalent forward contract no cashflows occur until T, in this case the investor must post an initial margin into an (interest earning) margin account. The value of the futures contract is calculated daily by the exchange in a procedure known as “marking to market” – where the change in value of the position over the course of a trading day is called the “variation margin”. The margin held on deposit is used to fund changes in the variation margin.
This differs markedly from the other energy commodities in that it cannot easily be stored on an industrial scale – there is such a thing as a “barrel” of electricity, but we probably know it as a battery. This greatly affects the volatility and the pricing of electricity derivatives, as we shall discuss in Chapter 7. Metals broadly can be separated into three major categories: (i) precious metals such as gold, silver and various platinum group metals; (ii) base metals, which are industrial non-ferrous metals such as copper, aluminium, lead, nickel, tin and zinc; and finally (iii) ferrous, by which we mean iron ore, iron, rolled iron, or steel or refined steel products such as rolled products, flat products, wires, bars and beams.
March was chosen to coincide with the end of winter, when transportation became feasible again. May was a preferred delivery month due to old-crop oats and wheat, harvested in the previous summer. December was chosen for new-crop corn (harvested in the autumn) and also because it was the final month before inclement weather would make attempts at winter transportation foolhardy. From futures it was only a small step to introducing options on futures – these were introduced in 1984 as options on soybean futures and 1985 saw the introduction of options on corn futures contracts.