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 The RWI/ISL-Container Throughput Index started off well in 2018
22.02.2018 | RWI – Leibniz-Institut für Wirtschaftsforschung

nachricht RWI/ISL-Container Throughput Index ending 2017 on a positive note
24.01.2018 | 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: Developing reliable quantum computers

International research team makes important step on the path to solving certification problems

Quantum computers may one day solve algorithmic problems which even the biggest supercomputers today can’t manage. But how do you test a quantum computer to...

Im Focus: In best circles: First integrated circuit from self-assembled polymer

For the first time, a team of researchers at the Max-Planck Institute (MPI) for Polymer Research in Mainz, Germany, has succeeded in making an integrated circuit (IC) from just a monolayer of a semiconducting polymer via a bottom-up, self-assembly approach.

In the self-assembly process, the semiconducting polymer arranges itself into an ordered monolayer in a transistor. The transistors are binary switches used...

Im Focus: Demonstration of a single molecule piezoelectric effect

Breakthrough provides a new concept of the design of molecular motors, sensors and electricity generators at nanoscale

Researchers from the Institute of Organic Chemistry and Biochemistry of the CAS (IOCB Prague), Institute of Physics of the CAS (IP CAS) and Palacký University...

Im Focus: Hybrid optics bring color imaging using ultrathin metalenses into focus

For photographers and scientists, lenses are lifesavers. They reflect and refract light, making possible the imaging systems that drive discovery through the microscope and preserve history through cameras.

But today's glass-based lenses are bulky and resist miniaturization. Next-generation technologies, such as ultrathin cameras or tiny microscopes, require...

Im Focus: Stem cell divisions in the adult brain seen for the first time

Scientists from the University of Zurich have succeeded for the first time in tracking individual stem cells and their neuronal progeny over months within the intact adult brain. This study sheds light on how new neurons are produced throughout life.

The generation of new nerve cells was once thought to taper off at the end of embryonic development. However, recent research has shown that the adult brain...

All Focus news of the innovation-report >>>

Anzeige

Anzeige

VideoLinks
Industry & Economy
Event News

2nd International Conference on High Temperature Shape Memory Alloys (HTSMAs)

15.02.2018 | Event News

Aachen DC Grid Summit 2018

13.02.2018 | Event News

How Global Climate Policy Can Learn from the Energy Transition

12.02.2018 | Event News

 
Latest News

Stiffness matters

22.02.2018 | Life Sciences

Magnetic field traces gas and dust swirling around supermassive black hole

22.02.2018 | Physics and Astronomy

First evidence of surprising ocean warming around Galápagos corals

22.02.2018 | Earth Sciences

VideoLinks
Science & Research
Overview of more VideoLinks >>>