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.

COMPRESSION BEHAVIOR AT HIGH STRAIN RATE FOR AN ULTRA HIGH PERFORMANCE CONCRETE

The need for a stronger and more durable building material is becoming more important as the structural engineering field expands and challenges the behavioral limits of current materials. One of the demands for stronger material is rooted in the effects that dynamic loading has on a structure. High strain rates on the order of 101 s-1 to 103 s-1, though a small part of the overall types of loading that occur anywhere between 10-8 s-1 to 104 s-1 and at any point in a structures life, have very important effects when considering dynamic loading on a structure. High strain rates such as these can cause the material and structure to behave differently than at slower strain rates, which necessitates the need for the testing of materials under such loading to understand its behavior. Ultra high performance concrete (UHPC), a relatively new material in the U.S. construction industry, exhibits many enhanced strength and durability properties compared to the standard normal strength concrete. However, the use of this material for high strain rate applications requires an understanding of UHPC’s dynamic properties under corresponding loads. One such dynamic property is the increase in compressive strength under high strain rate load conditions, quantified as the dynamic increase factor (DIF). This factor allows a designer to relate the dynamic compressive strength back to the static compressive strength, which generally is a well-established property. Previous research establishes the relationships for the concept of DIF in design. The generally accepted methodology for obtaining high strain rates to study the enhanced behavior of compressive material strength is the split Hopkinson pressure bar (SHPB). In this research, 83 Cor-Tuf UHPC specimens were tested in dynamic compression using a SHPB at Michigan Technological University. The specimens were separated into two categories: ambient cured and thermally treated, with aspect ratios of 0.5:1, 1:1, and 2:1 within each category. There was statistically no significant difference in mean DIF for the aspect ratios and cure regimes that were considered in this study. DIF’s ranged from 1.85 to 2.09. Failure modes were observed to be mostly Type 2, Type 4, or combinations thereof for all specimen aspect ratios when classified according to ASTM C39 fracture pattern guidelines. The Comite Euro-International du Beton (CEB) model for DIF versus strain rate does not accurately predict the DIF for UHPC data gathered in this study. Additionally, a measurement system analysis was conducted to observe variance within the measurement system and a general linear model analysis was performed to examine the interaction and main effects that aspect ratio, cannon pressure, and cure method have on the maximum dynamic stress.