Price risk management in the copper market using commodity derivatives and options strategies

Metals price risk management is a key issue related to financial risk in metal markets because of uncertainty of commodity price fluctuation, exchange rate, interest rate changes and huge price risk either to metals’ producers or consumers. Thus, it has been taken into account by all participants in metal markets including metals’ producers, consumers, merchants, banks, investment funds, speculators, traders and so on. Managing price risk provides stable income for both metals’ producers and consumers, so it increases the chance that a firm will invest in attractive projects. The purpose of this research is to evaluate risk management strategies in the copper market. The main tools and strategies of price risk management are hedging and other derivatives such as futures contracts, swaps and options contracts. Hedging is a transaction designed to reduce or eliminate price risk. Derivatives are financial instruments, whose returns are derived from other financial instruments and they are commonly used for managing financial risks. Although derivatives have been around in some form for centuries, their growth has accelerated rapidly during the last 20 years. Nowadays, they are widely used by financial institutions, corporations, professional investors, and individuals. This project is focused on the over-the-counter (OTC) market and its products such as exotic options, particularly Asian options. The first part of the project is a description of basic derivatives and risk management strategies. In addition, this part discusses basic concepts of spot and futures (forward) markets, benefits and costs of risk management and risks and rewards of positions in the derivative markets. The second part considers valuations of commodity derivatives. In this part, the options pricing model DerivaGem is applied to Asian call and put options on London Metal Exchange (LME) copper because it is important to understand how Asian options are valued and to compare theoretical values of the options with their market observed values. Predicting future trends of copper prices is important and would be essential to manage market price risk successfully. Therefore, the third part is a discussion about econometric commodity models. Based on this literature review, the fourth part of the project reports the construction and testing of an econometric model designed to forecast the monthly average price of copper on the LME. More specifically, this part aims at showing how LME copper prices can be explained by means of a simultaneous equation structural model (two-stage least squares regression) connecting supply and demand variables. A simultaneous econometric model for the copper industry is built: {█(Q_t^D=e^((-5.0485))∙P_((t-1))^((-0.1868) )∙〖GDP〗_t^((1.7151) )∙e^((0.0158)∙〖IP〗_t ) @Q_t^S=e^((-3.0785))∙P_((t-1))^((0.5960))∙T_t^((0.1408))∙P_(OIL(t))^((-0.1559))∙〖USDI〗_t^((1.2432))∙〖LIBOR〗_((t-6))^((-0.0561))@Q_t^D=Q_t^S )┤ P_((t-1))^CU=e^((-2.5165))∙〖GDP〗_t^((2.1910))∙e^((0.0202)∙〖IP〗_t )∙T_t^((-0.1799))∙P_(OIL(t))^((0.1991))∙〖USDI〗_t^((-1.5881))∙〖LIBOR〗_((t-6))^((0.0717) Where, Q_t^D and Q_t^Sare world demand for and supply of copper at time t respectively. P(t-1) is the lagged price of copper, which is the focus of the analysis in this part. GDPt is world gross domestic product at time t, which represents aggregate economic activity. In addition, industrial production should be considered here, so the global industrial production growth that is noted as IPt is included in the model. Tt is the time variable, which is a useful proxy for technological change. A proxy variable for the cost of energy in producing copper is the price of oil at time t, which is noted as POIL(t ) . USDIt is the U.S. dollar index variable at time t, which is an important variable for explaining the copper supply and copper prices. At last, LIBOR(t-6) is the 6-month lagged 1-year London Inter bank offering rate of interest. Although, the model can be applicable for different base metals' industries, the omitted exogenous variables such as the price of substitute or a combined variable related to the price of substitutes have not been considered in this study. Based on this econometric model and using a Monte-Carlo simulation analysis, the probabilities that the monthly average copper prices in 2006 and 2007 will be greater than specific strike price of an option are defined. The final part evaluates risk management strategies including options strategies, metal swaps and simple options in relation to the simulation results. The basic options strategies such as bull spreads, bear spreads and butterfly spreads, which are created by using both call and put options in 2006 and 2007 are evaluated. Consequently, each risk management strategy in 2006 and 2007 is analyzed based on the day of data and the price prediction model. As a result, applications stemming from this project include valuing Asian options, developing a copper price prediction model, forecasting and planning, and decision making for price risk management in the copper market.

Reflection, refraction, and rejection : copper smelting heritage and the execution of environmental policy

This dissertation examines the global technological and environmental history of copper smelting and the conflict that developed between historic preservation and environmental remediation at major copper smelting sites in the United States after their productive periods ended. Part I of the dissertation is a synthetic overview of the history of copper smelting and its environmental impact. After reviewing the basic metallurgy of copper ores, the dissertation contains successive chapters on the history of copper smelting to 1640, culminating in the so-called German, or Continental, processing system; on the emergence of the rival Welsh system during the British industrial revolution; and on the growth of American dominance in copper production the late 19th and early 20th centuries. The latter chapter focuses, in particular, on three of the most important early American copper districts: Michigan’s Keweenaw Peninsula, Tennessee’s Copper Basin, and Butte-Anaconda, Montana. As these three districts went into decline and ultimately out of production, they left a rich industrial heritage and significant waste and pollution problems generated by increasingly more sophisticated technologies capable of commercially processing steadily growing volumes of decreasingly rich ores. Part II of the dissertation looks at the conflict between historic preservation and environmental remediation that emerged locally and nationally in copper districts as they went into decline and eventually ceased production. Locally, former copper mining communities often split between those who wished to commemorate a region’s past importance and develop heritage tourism, and local developers who wished to clear up and clean out old industrial sites for other purposes. Nationally, Congress passed laws in the 1960s and 1970s mandating the preservation of historical resources (National Historic Preservation Act) and laws mandating the cleanup of contaminated landscapes (CERCLA, or Superfund), objectives sometimes in conflict – especially in the case of copper smelting sites. The dissertation devotes individual chapters to the conflicts that developed between environmental remediation, particularly involving the Environmental Protection Agency and the heritage movement in the Tennessee, Montana, and Michigan copper districts. A concluding chapter provides a broad model to illustrate the relationship between industrial decline, federal environmental remediation activities, and the growth of heritage consciousness in former copper mining and smelting areas, analyzes why the outcome varied in the three areas, and suggests methods for dealing with heritage-remediation issues to minimize conflict and maximize heritage preservation.

Synthesis, structure, and stability of metal-organic frameworks

Metal-organic frameworks (MOFs) obtained much attention because of their unusual structures and properties as well as their potential applications. This dissertation research was focused on (1) the effects of synthesis conditions on the structures of MOFs, (2) the thermal stability of MOFs, (3) pressure-induced amorphization, and (4) the effect of high-valent ions on the structure of a MOF. This research demonstrated that the crystal structure of MOF-5 could be controlled by drying solvents. If the vacuum solvent is dimethylformamide (DMF), the crystal structure of MOF-5 is tetragonal. In contrast, if the DMF is displaced by CH2Cl2 before the vacuum, the obtained MOF-5 occupies a cubic structure. Furthermore, it was found that the tetragonal MOF-5 exhibited a mediate surface area (300-1000 m2/g). The surface area of tetragonal MOF-5 is also dependent on Zn(NO3)2/H2BDC (H2BDC: terephthalic acid) molar ratios used for its synthesis. The optimum ratio is 1.38, at which synthesized tetragonal MOF-5 exhibits the highest crystallinity and surface area (1297 m2/g). The thermal stability and decomposition of MOF-5 were systematically investigated. The thermal decomposition of cubic and tetragonal MOF-5s resulted in the same products: CO2, benzene, amorphous carbon, and crystal ZnO. The thermal decomposition is due to breaking carboxylic bridges between benzene rings and Zn4O clusters. Identifying structural relationships between crystalline and noncrystalline states is of fundamental interest in materials research. Currently, amorphization of solid materials at ambient temperature requires an ultra-high pressure (several GPa). However, this research demonstrated that MOF-5 and IRMOF-8 can be irreversibly amorphized at ambient temperature by employing a low compressing pressure of 3.5 MPa, which is 100 times lower than that required for amorphization of other solids. Furthermore, the pressure-induced amorphization (PIA) of MOFs is strongly dependent on the changeability of bond angles. If the geometric structure of a MOF can allow bond angles to be changed without breaking bonds, it can easily be amorphized by compression. This can explain why MOF-5 and IRMOF-8 can easily be amorphized via compression than Cu-BTC. It is generally recognized that zeolitic imidazolate frameworks (ZIFs) occupy much higher stability than other types of MOFs. The representative of ZIFs is Zn(2-methylimidazole)2 (ZIF-8) exhibiting high-decomposition temperature and high chemical resistance to various solvents. However, so far, it is still unknown whether the high stability of ZIF-8 can be challenged by ions, which is important for its modification by doping ions. In this research, we performed aqueous salt solution treatment on ZIF-8, and the results showed that anions (Cl¯ and NO3¯) in a solution exhibited no effect on the crystal structure of ZIF-8. However, the effect of cations (in a solution) on structure of ZIF-8 strongly depends on the cation valences. The univalent metal cations showed no effect on the structure of ZIF-8, whereas the bivalent or higher-valent metal cations caused the collapse of ZIF-8 crystal structure. Therefore, structure stability of ZIF-8 is considered when it is subjected to the application, in which high-valent metal cations are involved.