Handbook of Multi-Commodity Markets and Products

Structuring, Trading and Risk Management
1. Auflage 2015
ISBN: 978-0-470-74524-3
Verlag: John Wiley & Sons Inc

Buch, Englisch, 1072 Seiten, Format (B × H): 171 mm x 248 mm, Gewicht: 1808 g

Reihe: Wiley Finance Series

Handbook of Multi-Commodity Markets and ProductsHandbook of Multi-Commodity Markets and Products offers traders, commodity brokers, and other professionals a practical and comprehensive manual that covers market structure and functioning, as well as the practice of trading across a wide range of commodity markets and products. Written in non-technical language, this important resource includes the information needed to begin to master the complexities of and to operate successfully in today’s challenging and fluctuating commodity marketplace.
Designed as a practical practitioner-orientated resource, the book includes a detailed overview of key markets – oil, coal, electricity, emissions, weather, industrial metals, freight, agricultural and foreign exchange – and contains a set of tools for analysing, pricing and managing risk for the individual markets. Market features and the main functioning rules of the markets in question are presented, along with the structure of basic financial products and standardised deals. A range of vital topics such as stochastic and econometric modelling, market structure analysis, contract engineering, as well as risk assessment and management are presented and discussed in detail with illustrative examples to commodity markets.
The authors showcase how to structure and manage both simple and more complex multi-commodity deals. Addressing the issues of profit-making and risk management, the book reveals how to exploit pay-off profiles and trading strategies on a diversified set of commodity prices. In addition, the book explores how to price energy products and other commodities belonging to markets segmented across specific structural features.
The Handbook of Multi-Commodity Markets and Products includes a wealth of proven methods and useful models that can be selected and developed in order to make appropriate estimations of the future evolution of prices and appropriate valuations of products. The authors additionally explore market risk issues and what measures of risk should be adopted for the purpose of accurately assessing exposure from multi-commodity portfolios.
This vital resource offers the models, tools, strategies and general information commodity brokers and other professionals need to succeed in today’s highly competitive marketplace.

Autoren/Hrsg.

Roncoroni, Andrea

Fusai, Gianluca

Cummins, Mark

Fachgebiete

• Wirtschaftswissenschaften Finanzsektor & Finanzdienstleistungen Anlagen & Wertpapiere
• Wirtschaftswissenschaften Volkswirtschaftslehre Internationale Wirtschaft Internationale Finanzmärkte
• Wirtschaftswissenschaften Finanzsektor & Finanzdienstleistungen Internationale Finanzmärkte
• Wirtschaftswissenschaften Finanzsektor & Finanzdienstleistungen Börse, Rohstoffe
• Wirtschaftswissenschaften Betriebswirtschaft Management Risikomanagement

Inhaltsverzeichnis

Preface xix

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

1.2.2 Aviation: Risk Profile and Hedging Strategies 11

1.2.3 Shipping: Risk Profile and Hedging Strategies 20

1.2.4 Land Transportation: Risk Profile and Hedging Strategies 27

1.2.5 Utilities: Risk Profile and Hedging Strategies 32

1.2.6 Refineries: Risk Profile and Hedging Strategies 35

1.2.7 Industrial Consumers: Risk Profile and Hedging Strategies 40

1.3 Oil Physical Market Hedging and Trading 41

1.3.1 The Actors, Futures and OTC Prices 41

1.3.2 The Most Commonly Used Financial Instruments 45

1.3.3 How to Monitor and Manage Risk 49

1.3.4 How to Create a Market View 52

1.3.5 Trading Strategies to Maximize a Market View 54

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

2.2.1 The Fundamentals of Energy Sources and Fossil Fuels 72

2.2.2 Process of Coal Formation 74

2.2.3 Coal Classification 74

2.2.4 Reserves and Resources 79

2.2.5 Coal Mining and Production 83

2.3 Use of Coal – Power Generation and More 90

2.3.1 Steam Coal and its Role in Power Generation 91

2.3.2 Coal-Fired Power Plant Technologies 93

2.3.3 Cement and Other Industry 95

2.3.4 Alternatives to Coal: Shale Gas and Other 95

2.3.5 Future Trend: CtL and Coal Bed Methane 101

2.4 Overview of Worldwide Steam Coal Supply and Demand 102

2.4.1 Atlantic Demand Market: Europe at its Core 102

2.4.2 Pacific Demand Market: China, India, Japan, Taiwan, Korea and SEA 104

2.4.3 Steam Coal Supply Regions: ID, AU, USA, SA, RU, CO and Others 107

2.4.4 Seaborne Freight 116

2.4.5 Geopolitical and Policy Environment 118

2.5 The Global Steam Coal Trade Market and its Future 121

2.5.1 Current and Future Market Dynamics of the Coal Trade 121

2.5.2 Future Steam Coal Price Trends 125

2.5.3 Future Source of Energy: What Role Will Coal Play? 127

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

3.1.1 Physical Structure 141

3.1.2 Natural Gas Market Hubs and Main Participants 146

3.1.3 Liquefied Natural Gas 147

3.1.4 Shale Gas 149

3.2 Natural Gas Contracting and Pricing 154

3.2.1 Natural Gas Price Formation 155

3.3 Financial Natural Gas Markets 158

3.3.1 Exchange-Based Markets 158

3.3.2 Natural Gas Futures 159

3.3.3 Natural Gas Options 172

3.3.4 OTC Markets and Products 179

References 180

Chapter 4 Electricity Markets and Products 181
Stefano Fiorenzani, Bernard Murphy and Mark Cummins

4.1 Market Structure and Price Components 181

4.1.1 Spot and Forward Markets 181

4.1.2 Supply and Demand Interaction 183

4.1.3 Electricity Derivatives 186

4.1.4 Power Price Models 189

4.1.5 Spot Price Analysis (IPEX Case) 196

4.1.6 Forward Price Analysis (EEX Case) 200

4.2 Renewables, Intra-Day Trading and Capacity Markets 205

4.2.1 Renewables Expansion Targets 205

4.2.2 Growth in Intra-Day Trading 206

4.2.3 Implications for Future Price Volatility and Price Profiles 207

4.2.4 Reforms and Innovations in Capacity Markets 209

4.2.5 Provision and Remuneration of Flexibility – Storage Assets 212

4.3 Risk Measures for Power Portfolios 216

4.3.1 Value-Based Risk Measures 216

4.3.2 Flow-Based Risk Measures 218

4.3.3 Credit Risk for Power Portfolios 220

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

5.2.1 The Climate Change Issue 224

5.2.2 The Economics of Externality and GHG Pollution 226

5.3 The Kyoto Protocol 227

5.3.1 The United Nations Framework Convention on Climate Change 227

5.3.2 The Conference of Parties and the Subsidiary Bodies 229

5.3.3 The Kyoto Protocol 229

5.3.4 The Road to Paris 231

5.4 The EU ETS 232

5.4.1 Institutional Features 232

5.4.2 Allocation Criteria 234

5.4.3 Market Players and the Permit Markets 236

5.4.4 The Future of the EU ETS 238

5.5 Regional Markets: A Fragmented Landscape 239

5.5.1 Regional Markets 239

5.5.2 Voluntary Markets 240

5.6 A New Asset Class: CO2 Emission Permits 241

5.6.1 Macroeconomic Models 242

5.6.2 Econometric Investigation of CO2 Permit Price Time-Series 243

5.6.3 Stochastic Equilibrium Models 251

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

6.2.1 Weather Events on the Demand Curve 258

6.2.2 Weather Events on the Supply Curve 260

6.2.3 Risk Measurement and Weather-at-Risk 262

6.3 Atmospheric Temperature and Natural Gas Market 264

6.3.1 Characterization of the Air Temperature Meteorological Variable 264

6.3.2 Degree Days 267

6.3.3 Volumetric Risk in the Natural Gas Market 270

6.4 Modification of Weather Risk Exposure with Weather Derivatives 272

6.4.1 Weather Derivatives for Temperature-Related Risk 273

6.5 Conclusions 276

Nomenclature 277

References 277

Chapter 7 Industrial Metals Markets and Products 279
Alessandro Porru

7.1 General Overview 279

7.1.1 Brief History of the LME 280

7.1.2 Non-ferrous Metals 282

7.1.3 Other Metals 291

7.1.4 LME Instruments 292

7.1.5 OTC Instruments 298

7.1.6 A New Player: The Investor 301

7.2 Forward Curves 305

7.2.1 Building LME’s Curves in Practice 308

7.2.2 Interpolation 313

7.2.3 LME, COMEX and SHFE Copper Curve and Arbitrage 314

7.2.4 Contango Limit… 318

7.2.5 …and No-Limit Backwardation 324

7.2.6 Hedging the Curve in Practice 328

7.3 Volatility 337

7.3.1 A European Disguised as an American 338

7.3.2 LME’s Closing Volatilities 339

7.3.3 Sticky Strike, Sticky Delta and Skew 342

7.3.4 Building the Surface in Practice 345

7.3.5 Considerations on Vega Hedging 348

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

8.2.1 The Sources of Risk in the Shipping Industry 356

8.2.2 Market Segmentation in the Shipping Industry 358

8.2.3 Empirical Regularities in Freight Rate Markets 359

8.2.4 Traditional Risk Management Strategies 365

8.3 Freight Rate Derivatives 366

8.3.1 Risk Management in Shipping 366

8.3.2 The Underlying Indices of Freight Rate Derivatives 366

8.3.3 The Freight Derivatives Market 372

8.3.4 Examples of Freight Derivatives Trading 380

8.4 Pricing, Hedging and Freight Rate Risk Measurement 382

8.4.1 Pricing and Hedging Effectiveness of Freight Derivatives 382

8.4.2 Value-at-Risk (VaR) in Freight Markets 384

8.4.3 Expected Shortfall (ES) in Freight Markets 389

8.4.4 Empirical Evidence on Freight Derivatives 390

8.5 Other Derivatives for the Shipping Industry 393

8.5.1 Bunker Fuel Derivatives 393

8.5.2 Vessel Value Derivatives 395

8.5.3 Foreign Exchange Rate Derivatives Contracts 395

8.5.4 Interest Rate Derivatives Contracts 396

8.6 Conclusion 396

Acknowledgements 396

References 397

Chapter 9 Agricultural and Soft Markets 399
Francis Declerk

9.1 Introduction: Stakes and Objectives 399

9.1.1 Stakes 399

9.1.2 Objectives 399

9.2 Agricultural Commodity Specificity and Futures Markets 400

9.2.1 Agricultural Commodity Specificity 400

9.2.2 Volatility of Agricultural Markets 402

9.2.3 Forward Contract and Futures Contract 402

9.2.4 Major Agricultural Futures Markets and Contracts 404

9.2.5 Roles of Futures Markets 405

9.2.6 Institutions Related to Futures Markets 406

9.2.7 Commodity Futures Contracts 406

9.2.8 The Operators 408

9.2.9 Monitoring Hedging: Settlement 409

9.2.10 Accounting and Tax Rules 409

9.3 Demand and Supply, Price Determinants and Dynamics 409

9.3.1 Supply and Demand for Agricultural Commodities: The Determinants 409

9.3.2 Agricultural Market Prices, Failures and Policies 413

9.3.3 The Price Dynamics of Seasonal and Storable Agricultural Commodities 416

9.3.4 The Features of Major Agricultural and Soft Markets 417

9.4 Hedging and Basis Management 466

9.4.1 Short Hedging for Producers 466

9.4.2 Long Hedging for Processors 469

9.4.3 Management of Basis Risk 471

9.5 The Financialization of Agricultural Markets and Hunger: Speculation and Regulation 480

9.5.1 Factors Affecting the Volatility of Agricultural Commodity Prices 480

9.5.2 Financialization: Impact of Non-commercial Traders on Market Price 483

9.5.3 The Financialization of Grain Markets and Speculation 484

9.5.4 Bubble or Not, Agricultural Commodities have Become an Asset Class 489

9.5.5 Price Volatility and Regulation 490

9.5.6 Ongoing Research about Speculation and Regulation 493

9.6 Conclusion about Hedging and Futures Contracts 493

9.6.1 Hedging Process 493

9.6.2 Key Success Factors for Agricultural Commodity Futures Contracts 494

9.6.3 Conclusion and Prospects 495

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

10.1.1 FX Rates and Spot Contracts 499

10.1.2 Outright and FX Swap Contracts 500

10.1.3 FX Option Contracts 504

10.1.4 Main Traded FX Options Structures 507

10.2 Pricing Models for FX Options 509

10.2.1 The Black–Scholes Model 510

10.3 The Volatility Surface 511

10.4 Barrier Options 512

10.4.1 A Taxonomy of Barrier Options 512

10.5 Sources of FX Risk Exposure 513

10.6 Hedging FX Exposures Embedded in Energy and Commodity Contracts 517

10.6.1 FX Forward Exposures and Conversions 518

10.6.2 FX-Linked Energy Contracts 522

10.7 Typical Hedging Structures for FX Risk Exposure 533

10.7.1 Collar Plain Vanilla 533

10.7.2 Leveraged Forward 536

10.7.3 Participating Forward 538

10.7.4 Knock-Out Forward 540

10.7.5 Knock-In Forward 543

10.7.6 Knock-In Knock-out Forward 545

10.7.7 Resettable Forward 548

10.7.8 Range Resettable Forward 550

References 553

Part Two Quantitative Topics

Chapter 11 An Introduction to Stochastic Calculus with Matlab® Examples 557
Laura Ballotta and Gianluca Fusai

11.1 Brownian Motion 558

11.1.1 Defining Brownian Motion 558

11.2 The Stochastic Integral and

Über Autor(innen)

ANDREA RONCORONI is Professor of Finance at ESSEC Business School (Paris-Singapore), regular Visiting Professor at Bocconi University (Milan), and Director of the ESSEC Energy and Commodity Finance research center. He holds PhD’s in Applied Mathematics and in Finance. His research interests primarily cover energy and commodity markets, corporate financial risk analysis and management, quantitative modelling, derivative design and valuation. Andrea put forward the Threshold Model for price simulation in spiky electricity markets, and devised FloRisk Metrics, an effective analytics to monitor and manage corporate financial exposure. He publishes in academic journals, professional reviews, financial book series, and acts as Associate Editor for the Journal of Energy Markets and Co-Editor for Argo Review. Andrea has co-authored the reference volume Implementing Models in Quantitative Finance. As a professional advisor, he consulted for private companies and public institutions, including Dong Energy, Edison, Enel, GDF, Natixis, and Trafigura Electricity Italia (TEI Energy). He is founder and CEO of Energisk, a start-up company developing cutting-edge risk analytics for corporate clients.

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.