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Handbook of Multi-Commodity Markets and Products: Structuring, Trading and Risk Management

Book Description

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.

    Table of Contents

    1. Preface
    2. Acknowledgements
    3. About the Editors
    4. List of Contributors
    5. Part One: Commodity Markets and Products
      1. Chapter 1: Oil Markets and Products
        1. 1.1 Introduction
        2. 1.2 Risk Management for Corporations: Hedging Using Derivative Instruments
        3. 1.3 Oil Physical Market Hedging and Trading
        4. Further Reading
        5. Notes
      2. Chapter 2: Coal Markets and Products
        1. 2.1 Introduction
        2. 2.2 Source of Coal – Synopsis of the Resource Coal
        3. 2.3 Use of Coal – Power Generation and More
        4. 2.4 Overview of Worldwide Steam Coal Supply and Demand
        5. 2.5 The Global Steam Coal Trade Market and its Future
        6. 2.6 Concluding Words
        7. Abbreviations and Definitions
        8. Acknowledgements
        9. References
      3. Chapter 3: Natural Gas Markets and Products
        1. 3.1 Physical Natural Gas Markets
        2. 3.2 Natural Gas Contracting and Pricing
        3. 3.3 Financial Natural Gas Markets
        4. References
        5. Notes
      4. Chapter 4: Electricity Markets and Products
        1. 4.1 Market Structure and Price Components
        2. 4.2 Renewables, Intra-Day Trading and Capacity Markets
        3. 4.3 Risk Measures for Power Portfolios
        4. References
        5. Further Reading
        6. Notes
      5. Chapter 5: Emissions Markets and Products
        1. 5.1 Introduction
        2. 5.2 Climate change and the economics of externalities
        3. 5.3 The Kyoto Protocol
        4. 5.4 The EU ETS
        5. 5.5 Regional Markets: A Fragmented Landscape
        6. 5.6 A New Asset Class: CO<sub xmlns="http://www.w3.org/1999/xhtml" xmlns:epub="http://www.idpf.org/2007/ops" xmlns:m="http://www.w3.org/1998/Math/MathML" xmlns:svg="http://www.w3.org/2000/svg">2</sub> Emission Permits Emission Permits
        7. Abbreviations
        8. References
        9. Notes
      6. Chapter 6: Weather Risk and Weather Derivatives
        1. 6.1 Introduction
        2. 6.2 Identification of Volumetric Risk
        3. 6.3 Atmospheric Temperature and Natural Gas Market
        4. 6.4 Modification of Weather Risk Exposure with Weather Derivatives
        5. 6.5 Conclusions
        6. Nomenclature
        7. References
        8. Notes
      7. Chapter 7: Industrial Metals Markets and Products
        1. 7.1 General Overview
        2. 7.2 Forward Curves
        3. 7.3 Volatility
        4. Acknowledgements
        5. References
        6. Further Reading
        7. Notes
      8. Chapter 8: Freight Markets and Products
        1. 8.1 Introduction
        2. 8.2 Business Risks in Shipping
        3. 8.3 Freight Rate Derivatives
        4. 8.4 Pricing, Hedging and Freight Rate Risk Measurement
        5. 8.5 Other Derivatives for the Shipping Industry
        6. 8.6 Conclusion
        7. Acknowledgements
        8. References
        9. Notes
      9. Chapter 9: Agricultural and Soft Markets
        1. 9.1 Introduction: Stakes and Objectives
        2. 9.2 Agricultural Commodity Specificity and Futures Markets
        3. 9.3 Demand and Supply, Price Determinants and Dynamics
        4. 9.4 Hedging and Basis Management
        5. 9.5 The Financialization of Agricultural Markets and Hunger: Speculation and Regulation
        6. 9.6 Conclusion about Hedging and Futures Contracts
        7. References
        8. Further Reading
        9. Glossary, Quotations and Policy on Websites
      10. Chapter 10: Foreign Exchange Markets and Products
        1. 10.1 The FX Market
        2. 10.2 Pricing Models for FX Options
        3. 10.3 The Volatility Surface
        4. 10.4 Barrier Options
        5. 10.5 Sources of FX Risk Exposure
        6. 10.6 Hedging FX Exposures Embedded in Energy and Commodity Contracts
        7. 10.7 Typical Hedging Structures for FX Risk Exposure
        8. References
        9. Notes
    6. Part Two: Quantitative Topics
      1. Chapter 11: An Introduction to Stochastic Calculus with Matlab<sup xmlns="http://www.w3.org/1999/xhtml" xmlns:epub="http://www.idpf.org/2007/ops" xmlns:m="http://www.w3.org/1998/Math/MathML" xmlns:svg="http://www.w3.org/2000/svg">&#174;</sup> Examples Examples
        1. 11.1 Brownian Motion
        2. 11.2 The Stochastic Integral and Stochastic Differential Equations
        3. 11.3 Introducing Itô's Formula
        4. 11.4 Important SDEs
        5. 11.5 Stochastic Processes with Jumps
        6. References
        7. Further Reading
        8. Note
      2. Chapter 12: Estimating Commodity Term Structure Volatilities
        1. 12.1 Introduction
        2. 12.2 Model Estimation Using the Kalman Filter
        3. 12.3 Principal Components Analysis
        4. 12.4 Conclusion
        5. Appendix
        6. References
        7. Note
      3. Chapter 13: Nonparametric Estimation of Energy and Commodity Price Processes
        1. 13.1 Introduction
        2. 13.2 Estimation Method
        3. 13.3 Empirical Results
        4. References
      4. Chapter 14: How to Build Electricity Forward Curves
        1. 14.1 Introduction
        2. 14.2 Review of the Literature
        3. 14.3 Electricity Forward Contracts
        4. 14.4 Smoothing Forward Price Curves
        5. 14.5 An Illustrative Example: Daily Forward Curve
        6. 14.6 Conclusion
        7. References
        8. Notes
      5. Chapter 15: GARCH Models for Commodity Markets
        1. 15.1 Introduction
        2. 15.2 The GARCH Model: General Definition
        3. 15.3 The IGARCH(<i xmlns="http://www.w3.org/1999/xhtml" xmlns:epub="http://www.idpf.org/2007/ops" xmlns:m="http://www.w3.org/1998/Math/MathML" xmlns:svg="http://www.w3.org/2000/svg">p</i>,,<i xmlns="http://www.w3.org/1999/xhtml" xmlns:epub="http://www.idpf.org/2007/ops" xmlns:m="http://www.w3.org/1998/Math/MathML" xmlns:svg="http://www.w3.org/2000/svg">q</i>) Model) Model
        4. 15.4 A Permanent and Transitory Component Model of Volatility
        5. 15.5 Asymmetric Models
        6. 15.6 Periodic GARCH
        7. 15.7 Nesting Models
        8. 15.8 Long-Memory GARCH Models
        9. 15.9 Estimation
        10. 15.10 Inference
        11. 15.11 Multivariate GARCH
        12. 15.12 Empirical Applications
        13. 15.13 Software
        14. References
        15. Notes
      6. Chapter 16: Pricing Commodity Swaps with Counterparty Credit Risk: The Case of Credit Value Adjustment
        1. 16.1 Introduction
        2. 16.2 Company Energy Policy
        3. 16.3 A Focus on Commodity Swap Contracts
        4. 16.4 Modelling the Dynamics of Oil Spot Prices and the Forward Curve
        5. 16.5 An Empirical Application
        6. 16.6 Measuring Counterparty Risk
        7. 16.7 Sensitivity Analysis
        8. 16.8 Accounting for Derivatives and Credit Value Adjustments
        9. 16.9 Conclusions
        10. References
        11. Further Reading
        12. Notes
      7. Chapter 17: Pricing Energy Spread Options
        1. 17.1 Spread options in energy markets
        2. 17.2 Pricing of spread options with zero strike
        3. 17.3 Issues of hedging
        4. 17.4 Pricing of spread options with nonzero strike
        5. Acknowledgement
        6. References
        7. Notes
      8. Chapter 18: Asian Options: Payoffs and Pricing Models
        1. 18.1 Payoff Structures
        2. 18.2 Pricing Asian Options in the Lognormal Setting
        3. 18.3 A Comparison
        4. 18.4 The Flexible Square-Root Model
        5. 18.5 Conclusions
        6. References
        7. Notes
      9. Chapter 19: Natural Gas Storage Modelling
        1. 19.1 Introduction
        2. 19.2 A Simple Model of Storage, Futures Prices, Spot Prices And Convenience Yield
        3. 19.3 Valuation of Gas Storage
        4. References
        5. Notes
      10. Chapter 20: Commodity-Linked Arbitrage Strategies and Portfolio Management
        1. 20.1 Commodity-Linked Arbitrage Strategies
        2. 20.2 Portfolio Optimization with Commodities
        3. Symbols
        4. References
        5. Notes
      11. Chapter 21: Econometric Analysis of Energy and Commodity Markets: Multiple Hypothesis Testing Techniques
        1. 21.1 Introduction
        2. 21.2 Multiple Hypothesis Testing
        3. 21.3 Energy–Emissions Market Interactions
        4. 21.4 Emissions Market Interactions
        5. 21.5 Quantitative Spread Trading in Oil Markets
        6. References
        7. Notes
    7. Appendix: A Quick Review of Distributions Relevant in Finance with Matlab<sup xmlns="http://www.w3.org/1999/xhtml" xmlns:epub="http://www.idpf.org/2007/ops" xmlns:m="http://www.w3.org/1998/Math/MathML" xmlns:svg="http://www.w3.org/2000/svg">&#174;</sup> Examples Examples
      1. A.1 The Normal Distribution
      2. A.2 The Lognormal Distribution
      3. A.3 The Chi-Square Distribution
      4. A.4 The Non-Central Chi-Square Distribution
      5. A.5 The Poisson Distribution
      6. A.6 The Exponential Distribution
      7. A.7 The Gamma Distribution
      8. A.8 The Multivariate Normal Distribution
      9. A.9 Simulating Random Variables
      10. Note
    8. Index
    9. EULA