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

Preface xix
<p>Acknowledgements xxiii</p>
<p>About the Editors xxv</p>
<p>List of Contributors xxvii</p>
<p>PART ONE Commodity Markets and Products</p>
<p>CHAPTER 1 Oil Markets and Products 3<br />Cristiano Campi and Francesco Galdenzi</p>
<p>1.1 Introduction 3</p>
<p>1.2 Risk Management for Corporations: Hedging Using Derivative Instruments 4</p>
<p>1.2.1 Crude Oil and Oil Products Risk Management for Corporations 4</p>
<p>1.3 Oil Physical Market Hedging and Trading 41</p>
<p>Further Reading 66</p>
<p>CHAPTER 2 Coal Markets and Products 67<br />Lars Schernikau</p>
<p>2.1 Introduction 67</p>
<p>2.2 Source of Coal Synopsis of the Resource Coal 72</p>
<p>2.3 Use of Coal Power Generation and More 90</p>
<p>2.4 Overview of Worldwide Steam Coal Supply and Demand 102</p>
<p>2.5 The Global Steam Coal Trade Market and its Future 121</p>
<p>2.6 Concluding Words 129</p>
<p>Abbreviations and Definitions 130</p>
<p>Acknowledgements 132</p>
<p>References 132</p>
<p>CHAPTER 3 Natural Gas Markets and Products 135<br />Mark Cummins and Bernard Murphy</p>
<p>3.1 Physical Natural Gas Markets 135</p>
<p>3.2 Natural Gas Contracting and Pricing 154</p>
<p>3.3 Financial Natural Gas Markets 158</p>
<p>References 180</p>
<p>CHAPTER 4 Electricity Markets and Products 181<br />Stefano Fiorenzani, Bernard Murphy and Mark Cummins</p>
<p>4.1 Market Structure and Price Components 181</p>
<p>4.2 Renewables, Intra–Day Trading and Capacity Markets 205</p>
<p>4.3 Risk Measures for Power Portfolios 216</p>
<p>References 221</p>
<p>Further Reading 221</p>
<p>CHAPTER 5 Emissions Markets and Products 223<br />Marc Chesney, Luca Taschini and Jonathan Gheyssens</p>
<p>5.1 Introduction 223</p>
<p>5.2 Climate Change and the Economics of Externalities 224</p>
<p>5.3 The Kyoto Protocol 227</p>
<p>5.4 The EU ETS 232</p>
<p>5.5 Regional Markets: A Fragmented Landscape 239</p>
<p>5.6 A New Asset Class: CO2 Emission Permits 241</p>
<p>Abbreviations 252</p>
<p>References 252</p>
<p>CHAPTER 6 Weather Risk and Weather Derivatives 255<br />Alessandro Mauro</p>
<p>6.1 Introduction 255</p>
<p>6.2 Identification of Volumetric Risk 257</p>
<p>6.3 Atmospheric Temperature and Natural Gas Market 264</p>
<p>6.4 Modification of Weather Risk Exposure with Weather Derivatives 272</p>
<p>6.5 Conclusions 276</p>
<p>Nomenclature 277</p>
<p>References 277</p>
<p>CHAPTER 7 Industrial Metals Markets and Products 279<br />Alessandro Porru</p>
<p>7.1 General Overview 279</p>
<p>7.2 Forward Curves 305</p>
<p>7.3 Volatility 337</p>
<p>Acknowledgements 352</p>
<p>References 353</p>
<p>Further Reading 353</p>
<p>CHAPTER 8 Freight Markets and Products 355<br />Manolis G. Kavussanos, Ilias D. Visvikis and Dimitris N. Dimitrakopoulos</p>
<p>8.1 Introduction 355</p>
<p>8.2 Business Risks in Shipping 356</p>
<p>8.3 Freight Rate Derivatives 366</p>
<p>8.4 Pricing, Hedging and Freight Rate Risk Measurement 382</p>
<p>8.5 Other Derivatives for the Shipping Industry 393</p>
<p>8.6 Conclusion 396</p>
<p>Acknowledgements 396</p>
<p>References 397</p>
<p>CHAPTER 9 Agricultural and Soft Markets 399<br />Francis Declerk</p>
<p>9.1 Introduction: Stakes and Objectives 399</p>
<p>9.2 Agricultural Commodity Specificity and Futures Markets 400</p>
<p>9.3 Demand and Supply, Price Determinants and Dynamics 409</p>
<p>9.4 Hedging and Basis Management 466</p>
<p>9.5 The Financialization of Agricultural Markets and Hunger: Speculation and Regulation 480</p>
<p>9.6 Conclusion about Hedging and Futures Contracts 493</p>
<p>References 495</p>
<p>Further Reading 496</p>
<p>Glossary, Quotations and Policy on Websites 497</p>
<p>CHAPTER 10 Foreign Exchange Markets and Products 499<br />Antonio Castagna</p>
<p>10.1 The FX Market 499</p>
<p>10.2 Pricing Models for FX Options 509</p>
<p>10.3 The Volatility Surface 511</p>
<p>10.4 Barrier Options 512</p>
<p>10.5 Sources of FX Risk Exposure 513</p>
<p>10.6 Hedging FX Exposures Embedded in Energy and Commodity Contracts 517</p>
<p>10.7 Typical Hedging Structures for FX Risk Exposure 533</p>
<p>References 553</p>
<p>PART TWO Quantitative Topics</p>
<p>CHAPTER 11 An Introduction to Stochastic Calculus with Matlab&reg; Examples 557<br />Laura Ballotta and Gianluca Fusai</p>
<p>11.1 Brownian Motion 558</p>
<p>11.2 The Stochastic Integral and Stochastic Differential Equations 566</p>
<p>11.3 Introducing It o s Formula 575</p>
<p>11.4 Important SDEs 581</p>
<p>11.5 Stochastic Processes with Jumps 618</p>
<p>References 633</p>
<p>Further Reading 633</p>
<p>CHAPTER 12 Estimating Commodity Term Structure Volatilities 635<br />Andrea Roncoroni, Rachid Id Brik and Mark Cummins</p>
<p>12.1 Introduction 635</p>
<p>12.2 Model Estimation Using the Kalman Filter 635</p>
<p>12.3 Principal Components Analysis 646</p>
<p>12.4 Conclusion 655</p>
<p>Appendix 655</p>
<p>References 657</p>
<p>CHAPTER 13 Nonparametric Estimation of Energy and Commodity Price Processes 659<br />Gianna Fig&agrave;–Talamanca and Andrea Roncoroni</p>
<p>13.1 Introduction 659</p>
<p>13.2 Estimation Method 660</p>
<p>13.3 Empirical Results 663</p>
<p>References 672</p>
<p>CHAPTER 14 How to Build Electricity Forward Curves 673<br />Ruggero Caldana, Gianluca Fusai and Andrea Roncoroni</p>
<p>14.1 Introduction 673</p>
<p>14.2 Review of the Literature 674</p>
<p>14.3 Electricity Forward Contracts 675</p>
<p>14.4 Smoothing Forward Price Curves 677</p>
<p>14.5 An Illustrative Example: Daily Forward Curve 679</p>
<p>14.6 Conclusion 684</p>
<p>References 684</p>
<p>CHAPTER 15 GARCH Models for Commodity Markets 687<br />Eduardo Rossi and Filippo Spazzini</p>
<p>15.1 Introduction 687</p>
<p>15.2 The GARCH Model: General Definition 690</p>
<p>15.3 The IGARCH(p,q) Model 699</p>
<p>15.4 A Permanent and Transitory Component Model of Volatility 700</p>
<p>15.5 Asymmetric Models 702</p>
<p>15.6 Periodic GARCH 707</p>
<p>15.7 Nesting Models 708</p>
<p>15.8 Long–Memory GARCH Models 713</p>
<p>15.9 Estimation 720</p>
<p>15.10 Inference 722</p>
<p>15.11 Multivariate GARCH 725</p>
<p>15.12 Empirical Applications 727</p>
<p>15.13 Software 740</p>
<p>References 748</p>
<p>CHAPTER 16 Pricing Commodity Swaps with Counterparty Credit Risk: The Case of Credit Value Adjustment 755<br />Marina Marena, Gianluca Fusai and Chiara Quaglini</p>
<p>16.1 Introduction 755</p>
<p>16.2 Company Energy Policy 756</p>
<p>16.3 A Focus on Commodity Swap Contracts 758</p>
<p>16.4 Modelling the Dynamics of Oil Spot Prices and the Forward Curve 760</p>
<p>16.5 An Empirical Application 764</p>
<p>16.6 Measuring Counterparty Risk 777</p>
<p>16.7 Sensitivity Analysis 788</p>
<p>16.8 Accounting for Derivatives and Credit Value Adjustments 788</p>
<p>16.9 Conclusions 797</p>
<p>References 798</p>
<p>Further Reading 798</p>
<p>CHAPTER 17 Pricing Energy Spread Options 801<br />Fred Espen Benth and Hanna Zdanowicz</p>
<p>17.1 Spread Options in Energy Markets 801</p>
<p>17.2 Pricing of Spread Options with Zero Strike 805</p>
<p>17.3 Issues of hedging 813</p>
<p>17.4 Pricing of Spread Options with Nonzero Strike 815</p>
<p>Acknowledgement 824</p>
<p>References 825</p>
<p>CHAPTER 18 Asian Options: Payoffs and Pricing Models 827<br />Gianluca Fusai, Marina Marena and Giovanni Longo</p>
<p>18.1 Payoff Structures 832</p>
<p>18.2 Pricing Asian Options in the Lognormal Setting 833</p>
<p>18.3 A Comparison 856</p>
<p>18.4 The Flexible Square–Root Model 858</p>
<p>18.5 Conclusions 874</p>
<p>References 874</p>
<p>CHAPTER 19 Natural Gas Storage Modelling 877<br />&Aacute;lvaro Cartea, James Cheeseman and Sebastian Jaimungal</p>
<p>19.1 Introduction 877</p>
<p>19.2 A Simple Model of Storage, Futures Prices, Spot Prices And Convenience Yield 878</p>
<p>19.3 Valuation of Gas Storage 880</p>
<p>References 899</p>
<p>CHAPTER 20 Commodity–Linked Arbitrage Strategies and Portfolio Management 901<br />Viviana Fanelli</p>
<p>20.1 Commodity–Linked Arbitrage Strategies 902</p>
<p>20.2 Portfolio Optimization with Commodities 921</p>
<p>Symbols 936</p>
<p>References 936</p>
<p>CHAPTER 21 Econometric Analysis of Energy and Commodity Markets: Multiple Hypothesis Testing Techniques 939<br />Mark Cummins</p>
<p>21.1 Introduction 939</p>
<p>21.2 Multiple Hypothesis Testing 940</p>
<p>21.3 Energy Emissions Market Interactions 943</p>
<p>21.4 Emissions Market Interactions 953</p>
<p>21.5 Quantitative Spread Trading in Oil Markets 956</p>
<p>References 964</p>
<p>APPENDIX</p>
<p>A Quick Review of Distributions Relevant in Finance with Matlab&reg; Examples 967<br />Laura Ballotta and Gianluca Fusai</p>
<p>Index</p>