The (de)merits of minimum-variance hedging: application to the crack spread

We study the empirical performance of the classical minimum-variance hedging strategy, comparing several econometric models for estimating hedge ratios of crude oil, gasoline and heating oil crack spreads. Given the great variability and large jumps in both spot and futures prices, considerable care is required when processing the relevant data and accounting for the costs of maintaining and re-balancing the hedge position. We find that the variance reduction produced by all models is statistically and economically indistinguishable from the one-for-one “naïve” hedge. However, minimum-variance hedging models, especially those based on GARCH, generate much greater margin and transaction costs than the naïve hedge. Therefore we encourage hedgers to use a naïve hedging strategy on the crack spread bundles now offered by the exchange; this strategy is the cheapest and easiest to implement. Our conclusion contradicts the majority of the existing literature, which favours the implementation of GARCH-based hedging strategies.

Effects of the 5-HT(1A) agonist (+/-)-8-hydroxy-2-(di-n-propylamino)tetralin (8-OH-DPAT) on cocaine choice in cynomolgus monkeys

Drugs that alter brain serotonin (5-HT) function can modulate the behavioral effects of cocaine, but the underlying receptor mechanisms are poorly understood. The present study examined the effects of the selective 5-HT1A receptor agonist (+/-)-8-hydroxy-2-(di-n-propylamino)tetralin (8-OH-DPAT, 0.01-0.1 mg/kg, i.v.) on cocaine self-administration in the context of a choice procedure. Five adult male cynomolgus monkeys self-administered cocaine (saline, 0.003-0.03 mg/kg per injection) under a concurrent fixed-ratio 50 schedule of food (1-g banana-flavored pellets) and cocaine presentation. Allocation of responses to the cocaine-associated lever (cocaine choice) increased in a dose-related manner from < or =20% of total responses when saline or 0.003 mg/kg per injection cocaine was the alternative to food to > or =75% when 0.03 mg/kg per injection cocaine was available. In four of five monkeys, when choice was between a low cocaine dose and food, 0.01 mg/kg 8-OH-DPAT increased injection-lever responding. At cocaine doses which occasioned > or =75% cocaine choice, 8-OH-DPAT did not alter response allocation. In the fifth monkey, 8-OH-DPAT only decreased injection-lever responding. When choice was between saline and food, 8-OH-DPAT did not reliably shift responding to the injection lever, except at doses that disrupted operant performance. These results suggest that a 5-HT1A receptor agonist can increase the reinforcing strength of a low cocaine dose relative to a concurrently available non-drug reinforcer.

Assessment of the relative reinforcing strength of cocaine in socially housed monkeys using a choice procedure.

Position in the social hierarchy can influence brain dopamine function and cocaine reinforcement in nonhuman primates during early cocaine exposure. With prolonged exposure, however, initial differences in rates of cocaine self-administration between dominant and subordinate monkeys dissipate. The present studies used a choice procedure to assess the relative reinforcing strength of cocaine in group-housed male cynomolgus monkeys with extensive cocaine self-administration histories. Responding was maintained under a concurrent fixed-ratio 50 schedule of food and cocaine (0.003-0.1 mg/kg per injection) presentation. Responding on the cocaine-associated lever increased as a function of cocaine dose in all monkeys. Although response distribution was similar across social rank when saline or relatively low or high cocaine doses were the alternative to food, planned t tests indicated that cocaine choice was significantly greater in subordinate monkeys when choice was between an intermediate dose (0.01 mg/kg) and food. When a between-session progressive-ratio procedure was used to increase response requirements for the preferred reinforcer (either cocaine or food), choice of that reinforcer decreased in all monkeys. The average response requirement that produced a shift in response allocation from the cocaine-associated lever to the food-associated lever was higher in subordinates across cocaine doses, an effect that trended toward significance (p = 0.053). These data indicate that despite an extensive history of cocaine self-administration, most subordinate monkeys were more sensitive to the relative reinforcing strength of cocaine than dominant monkeys.

An empirical model comparison for valuing crack spread options

In this paper, we investigate the pricing of crack spread options. Particular emphasis is placed on the question of whether univariate modeling of the crack spread or explicit modeling of the two underlyings is preferable. Therefore, we contrast a bivariate GARCH volatility model for cointegrated underlyings with the alternative of modeling the crack spread directly. Conducting an empirical analysis of crude oil/heating oil and crude oil/gasoline crack spread options traded on the New York Mercantile Exchange, the more simplistic univariate approach is found to be superior with respect to option pricing performance.

Mode I fracture of sheet metal

The perceived wisdom about thin sheet fracture is that (i) the crack propagates under mixed mode I & III giving rise to a slant through-thickness fracture profile and (ii) the fracture toughness remains constant at low thickness and eventually decreases with increasing thickness. In the present study, fracture tests performed on thin DENT plates of various thicknesses made of stainless steel, mild steel, 6082-O and NS4 aluminium alloys, brass, bronze, lead, and zinc systematically exhibit (i) mode I “bath-tub”, i.e. “cup & cup”, fracture profiles with limited shear lips and significant localized necking (more than 50% thickness reduction), (ii) a fracture toughness that linearly increases with increasing thickness (in the range of 0.5–5 mm). The different contributions to the work expended during fracture of these materials are separated based on dimensional considerations. The paper emphasises the two parts of the work spent in the fracture process zone: the necking work and the “fracture” work. Experiments show that, as expected, the work of necking per unit area linearly increases with thickness. For a typical thickness of 1 mm, both fracture and necking contributions have the same order of magnitude in most of the metals investigated. A model is developed in order to independently evaluate the work of necking, which successfully predicts the experimental values. Furthermore, it enables the fracture energy to be derived from tests performed with only one specimen thickness. In a second modelling step, the work of fracture is computed using an enhanced void growth model valid in the quasi plane stress regime. The fracture energy varies linearly with the yield stress and void spacing and is a strong function of the hardening exponent and initial void volume fraction. The coupling of the two models allows the relative contributions of necking versus fracture to be quantified with respect to (i) the two length scales involved in this problem, i.e. the void spacing and the plate thickness, and (ii) the flow properties of the material. Each term can dominate depending on the properties of the material which explains the different behaviours reported in the literature about thin plate fracture toughness and its dependence with thickness.

Investigation of the fracture mode for hard and soft wheat endosperm using the loading-unloading bending test

Investigation of the fracture mode for hard and soft wheat endosperm was aimed at gaining a better understanding of the fragmentation process. Fracture mechanical characterization was based on the three-point bending test which enables stable crack propagation to take place in small rectangular pieces of wheat endosperm. The crack length can be measured in situ by using an optical microscope with light illumination from the side of the specimen or from the back of the specimen. Two new techniques were developed and used to estimate the fracture toughness of wheat endosperm, a geometric approach and a compliance method. The geometric approach gave average fracture toughness values of 53.10 and 27.0 J m(-2) for hard and soft endosperm, respectively. Fracture toughness estimated using the compliance method gave values of 49.9 and 29.7 J m(-2) for hard and soft endosperm, respectively. Compressive properties of the endosperm in three mutually perpendicular axes revealed that the hard and soft endosperms are isotropic composites. Scanning electron microscopy (SEM) observation of the fracture surfaces and the energy-time curves of loading-unloading cycles revealed that there was a plastic flow during crack propagation for both the hard and soft endosperms, and confirmed that the fracture mode is significantly related to the adhesion level between starch granules and the protein matrix.

Rate-dependent fracture toughness of polycrystalline ice

A series of three-point bend tests using single edge notched testpieces of pure polycrystalline ice have been performed at three different temperatures (–20°C, –30°C and –40°C). The displacement rate was varied from 1 mm/min to 100 mm/min, producing the crack tip strain rates from about 10–3 to 10–1 s–1. The results show that (a) the fracture toughness of pure polycrystalline ice given by the critical stress intensity factor (K IC) is much lower than that measured from the J—integral under identical conditions; (b) from the determination of K IC, the fracture toughness of pure polycrystalline ice decreases with increasing strain rate and there is good power law relationship between them; (c) from the measurement of the J—integral, a different tendency was appeared: when the crack tip strain rate exceeds a critical value of 6 × 10–3 s–1, the fracture toughness is almost constant but when the crack tip strain rate is less than this value, the fracture toughness increases with decreasing crack tip strain rate. Re-examination of the mechanisms of rate-dependent fracture toughness of pure polycrystalline ice shows that the effect of strain rate is related not only to the blunting of crack tips due to plasticity, creep and stress relaxation but also to the nucleation and growth of microcracks in the specimen.

Putting the coke in coke

The story of cocaine: from royalty to popular refresher... Surprising as it sounds, Coca Cola gets its name from one of its original ingredients - cocaine. And although the drug's now illegal, this wasn't always the case. But how did it become popular, what led to its downfall, and how does Coca Cola come in to it?

Self-assembled healable materials through a combination of pi-pi stacking and hydrogen bonding

The discovery of polymers with stimuli responsive physical properties is a rapidly expanding area of research. At the forefront of the field are self-healing polymers, which, when fractured can regain the mechanical properties of the material either autonomically, or in response to a stimulus. It has long been known that it is possible to promote healing in conventional thermoplastics by heating the fracture zone above the Tg of the polymer under pressure. This process requires reptation and subsequent re-entanglement of macromolecules across the fracture void, which serves to bridge, and ‘heal’ the crack. The timescale for this mechanism is highly dependent on the molecular weight of the polymer being studied. This process is in contrast to that required to affect healing in supramolecular polymers such as the plasticised, hydrogen bonded elastomer reported by Leibler et al. The disparity in bond energies between the non-covalent and covalent bonds within supramolecular polymers results in fractures propagating through scission of the comparatively weak supramolecular interactions, rather than through breaking the stronger, covalent bonds. Thus, during the healing process the macromolecules surrounding the fracture site only need sufficient energy to re-engage their supramolecular interactions in order to regenerate the strength of the pristine material. Herein we describe the design, synthesis and optimization of a new class of supramolecular polymer blends that harness the reversible nature of pi-pi stacking and hydrogen bonding interactions to produce self-supporting films with facile healable characteristics.

Selective biodegradation of keratin matrix in feather rachis reveals classic bioengineering

Flight necessitates that the feather rachis is extremely tough and light. Yet, the crucial filamentous hierarchy of the rachis is unknown—study hindered by the tight chemical bonding between the filaments and matrix. We used novel microbial biodegradation to delineate the fibres of the rachidial cortex in situ. It revealed the thickest keratin filaments known to date (factor >10), approximately 6 µm thick, extending predominantly axially but with a small outer circumferential component. Near-periodic thickened nodes of the fibres are staggered with those in adjacent fibres in two- and three-dimensional planes, creating a fibre–matrix texture with high attributes for crack stopping and resistance to transverse cutting. Close association of the fibre layer with the underlying ‘spongy’ medulloid pith indicates the potential for higher buckling loads and greater elastic recoil. Strikingly, the fibres are similar in dimensions and form to the free filaments of the feather vane and plumulaceous and embryonic down, the syncitial barbules, but, identified for the first time in 140+ years of study in a new location—as a major structural component of the rachis. Early in feather evolution, syncitial barbules were consolidated in a robust central rachis, definitively characterizing the avian lineage of keratin.

Closed form approximations for spread options

This article expresses the price of a spread option as the sum of the prices of two compound options. One compound option is to exchange vanilla call options on the two underlying assets and the other is to exchange the corresponding put options. This way we derive a new closed form approximation for the price of a European spread option and a corresponding approximation for each of its price, volatility and correlation hedge ratios. Our approach has many advantages over existing analytical approximations, which have limited validity and an indeterminacy that renders them of little practical use. The compound exchange option approximation for European spread options is then extended to American spread options on assets that pay dividends or incur costs. Simulations quantify the accuracy of our approach; we also present an empirical application to the American crack spread options that are traded on NYMEX. For illustration, we compare our results with those obtained using the approximation attributed to Kirk (1996, Correlation in energy markets. In: V. Kaminski (Ed.), Managing Energy Price Risk, pp. 71–78 (London: Risk Publications)), which is commonly used by traders.

Effect of shear rupture on aggregate scale formation in sea ice

A discrete element model is used to study shear rupture of sea ice under convergent wind stresses. The model includes compressive, tensile, and shear rupture of viscous elastic joints connecting floes that move under the action of the wind stresses. The adopted shear rupture is governed by Coulomb’s criterion. The ice pack is a 400 km long square domain consisting of 4 km size floes. In the standard case with tensile strength 10 times smaller than the compressive strength, under uniaxial compression the failure regime is mainly shear rupture with the most probable scenario corresponding to that with the minimum failure work. The orientation of cracks delineating formed aggregates is bimodal with the peaks around the angles given by the wing crack theory determining diamond-shaped blocks. The ice block (floe aggregate) size decreases as the wind stress gradient increases since the elastic strain energy grows faster leading to a higher speed of crack propagation. As the tensile strength grows, shear rupture becomes harder to attain and compressive failure becomes equally important leading to elongation of blocks perpendicular to the compression direction and the blocks grow larger. In the standard case, as the wind stress confinement ratio increases the failure mode changes at a confinement ratio within 0.2–0.4, which corresponds to the analytical critical confinement ratio of 0.32. Below this value, the cracks are bimodal delineating diamond shape aggregates, while above this value failure becomes isotropic and is determined by small-scale stress anomalies due to irregularities in floe shape.

Modelling the reorientation of sea-ice faults as the wind changes direction

A discrete-element model of sea ice is used to study how a 90° change in wind direction alters the pattern of faults generated through mechanical failure of the ice. The sea-ice domain is 400km in size and consists of polygonal floes obtained through a Voronoi tessellation. Initially the floes are frozen together through viscous–elastic joints that can break under sufficient compressive, tensile and shear deformation. A constant wind-stress gradient is applied until the initially frozen ice pack is broken into roughly diamond-shaped aggregates, with crack angles determined by wing-crack formation. Then partial refreezing of the cracks delineating the aggregates is modelled through reduction of their length by a particular fraction, the ice pack deformation is neglected and the wind stress is rotated by 90°. New cracks form, delineating aggregates with a different orientation. Our results show the new crack orientation depends on the refrozen fraction of the initial faults: as this fraction increases, the new cracks gradually rotate to the new wind direction, reaching 90° for fully refrozen faults. Such reorientation is determined by a competition between new cracks forming at a preferential angle determined by the wing-crack theory and at old cracks oriented at a less favourable angle but having higher stresses due to shorter contacts across the joints