(Handbook of) Multi-Commodity Markets and Products : Structuring, Trading and Risk Management / Edited by Andrea Roncoroni, Gianluca Fusai, Mark Cummins
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 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 Itˆo’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