Forum for Science, Industry and Business

Sponsored by:     3M 
Search our Site:

 

Modeling, Valuation and Risk Management of Commodity Derivatives

30.11.2005


Harri Toivonen, M.Sc. (Econ), will defend his PhD dissertation at the Helsinki School of Economics (HSE) on Friday, December 2, 2005. The dissertation is entitled “Modeling, Valuation and Risk Management of Commodity Derivatives” and is in the field of Finance. The public defense will start at 12:00 in the auditorium of the Chydenia building (address Runeberginkatu 22-24). The opponent is Professor Petri Sahlström (Tampere University of Technology) and the custos is Professor Hannu Seristö (HSE).



In his study Toivonen examines modeling, valuation and risk management of commodity derivatives. According to United Nations International Trade Statistics more than 40% of world trade consists of primary commodities. Both long-term trends and short-term fluctuations in commodity prices have important consequences for global economic growth. On the supply side of the market many developing countries still continue to rely heavily on commodities for their export earnings. On the demand side, commodity markets play a major role in transmitting business cycle disturbances and consequently affecting the revenues of corporations and the inflation rates of economies across industrial nations. Toivonen aims to contribute to the existing literature through four interrelated essays using unique long-term commodity swap data in Brent crude oil and NBSK pulp commodity markets.

The first essay, Modeling Term Structure of Commodity Prices – Swapping the Convenience, studies the modeling of long-term commodity forward prices. We find support for the existence of the theory of storage. There is a statistically significant inverse relationship between the convenience yield, the return to the holder of the physical commodity, and the level of physical inventories. The paper also finds support for the so-called maturity effect, i.e. a declining volatility term structure, in long-term commodity forward markets. This decreasing volatility term structure implies mean-reverting spot commodity prices in the long-run.


The second essay, Volatility of Commodity Forward Prices, compares alternative multivariate models of volatility in order to model volatility of commodity forwards. We find that the Multivariate Stochastic Volatility model (MSV) and the simpler Exponentially Weighted Moving Average (EWMA) method outperform different Multivariate Generalized Autoregressive Conditional Heteroskedasticity (GARCH) models and simpler methods in both markets. The findings also suggest that there is a negative relationship between the spot volatility and the level of inventories as the theory of storage stipulates.

The third essay, Hedging Long-Term Commodity Forward Price Risk, investigates the problem of hedging long-term commitments with short-term futures empirically, to our knowledge for the first time in the existing literature, with actual long-term commodity market data. This problem is also known as the Metallgeschellschaft problem in the existing literature. Empirical evidence is found that neither simple time-series-based nor one-factor model-based hedging strategies can sufficiently capture the characteristics of the term-structure of forward prices.

The fourth essay, Pricing Quanto Commodity Swaptions, presents a formula for pricing quanto commodity swaptions. Quanto or cross currency effects are particularly common in commodity markets as most of the markets are US dollar denominated. Toivonen utilizes the forward price based approach and the change of measure technique to derive a simple closed-form solution for European quanto commodity swaptions.

Eeva Lehtinen | alfa
Further information:
http://helecon3.hkkk.fi/diss/
http://www.hse.fi

More articles from Business and Finance:

nachricht Microtechnology industry is hiring – positive developments of past years continue
09.04.2018 | IVAM Fachverband für Mikrotechnik

nachricht RWI/ISL-Container Throughput Index with minor decline on a high overall level
20.03.2018 | RWI – Leibniz-Institut für Wirtschaftsforschung

All articles from Business and Finance >>>

The most recent press releases about innovation >>>

Die letzten 5 Focus-News des innovations-reports im Überblick:

Im Focus: Powerful IT security for the car of the future – research alliance develops new approaches

The more electronics steer, accelerate and brake cars, the more important it is to protect them against cyber-attacks. That is why 15 partners from industry and academia will work together over the next three years on new approaches to IT security in self-driving cars. The joint project goes by the name Security For Connected, Autonomous Cars (SecForCARs) and has funding of €7.2 million from the German Federal Ministry of Education and Research. Infineon is leading the project.

Vehicles already offer diverse communication interfaces and more and more automated functions, such as distance and lane-keeping assist systems. At the same...

Im Focus: Molecular switch will facilitate the development of pioneering electro-optical devices

A research team led by physicists at the Technical University of Munich (TUM) has developed molecular nanoswitches that can be toggled between two structurally different states using an applied voltage. They can serve as the basis for a pioneering class of devices that could replace silicon-based components with organic molecules.

The development of new electronic technologies drives the incessant reduction of functional component sizes. In the context of an international collaborative...

Im Focus: LZH showcases laser material processing of tomorrow at the LASYS 2018

At the LASYS 2018, from June 5th to 7th, the Laser Zentrum Hannover e.V. (LZH) will be showcasing processes for the laser material processing of tomorrow in hall 4 at stand 4E75. With blown bomb shells the LZH will present first results of a research project on civil security.

At this year's LASYS, the LZH will exhibit light-based processes such as cutting, welding, ablation and structuring as well as additive manufacturing for...

Im Focus: Self-illuminating pixels for a new display generation

There are videos on the internet that can make one marvel at technology. For example, a smartphone is casually bent around the arm or a thin-film display is rolled in all directions and with almost every diameter. From the user's point of view, this looks fantastic. From a professional point of view, however, the question arises: Is that already possible?

At Display Week 2018, scientists from the Fraunhofer Institute for Applied Polymer Research IAP will be demonstrating today’s technological possibilities and...

Im Focus: Explanation for puzzling quantum oscillations has been found

So-called quantum many-body scars allow quantum systems to stay out of equilibrium much longer, explaining experiment | Study published in Nature Physics

Recently, researchers from Harvard and MIT succeeded in trapping a record 53 atoms and individually controlling their quantum state, realizing what is called a...

All Focus news of the innovation-report >>>

Anzeige

Anzeige

VideoLinks
Industry & Economy
Event News

In focus: Climate adapted plants

25.05.2018 | Event News

Save the date: Forum European Neuroscience – 07-11 July 2018 in Berlin, Germany

02.05.2018 | Event News

Invitation to the upcoming "Current Topics in Bioinformatics: Big Data in Genomics and Medicine"

13.04.2018 | Event News

 
Latest News

In focus: Climate adapted plants

25.05.2018 | Event News

Flow probes from the 3D printer

25.05.2018 | Machine Engineering

Less is more? Gene switch for healthy aging found

25.05.2018 | Life Sciences

VideoLinks
Science & Research
Overview of more VideoLinks >>>