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.

Information integration and management through the design and construction phases of a project life cycle

Information management is a key aspect of successful construction projects. Having inaccurate measurements and conflicting data can lead to costly mistakes, and vague quantities can ruin estimates and schedules. Building information modeling (BIM) augments a 3D model with a wide variety of information, which reduces many sources of error and can detect conflicts before they occur. Because new technology is often more complex, it can be difficult to effectively integrate it with existing business practices. In this paper, we will answer two questions: How can BIM add value to construction projects? and What lessons can be learned from other companies that use BIM or other similar technology? Previous research focused on the technology as if it were simply a tool, observing problems that occurred while integrating new technology into existing practices. Our research instead looks at the flow of information through a company and its network, seeing all the actors as part of an ecosystem. Building upon this idea, we proposed the metaphor of an information supply chain to illustrate how BIM can add value to a construction project. This paper then concludes with two case studies. The first case study illustrates a failure in the flow of information that could have prevented by using BIM. The second case study profiles a leading design firm that has used BIM products for many years and shows the real benefits of using this program.

Resource management in location aware cognitive radio networks

Dynamic spectrum access (DSA) aims at utilizing spectral opportunities both in time and frequency domains at any given location, which arise due to variations in spectrum usage. Recently, Cognitive radios (CRs) have been proposed as a means of implementing DSA. In this work we focus on the aspect of resource management in overlaid CRNs. We formulate resource allocation strategies for cognitive radio networks (CRNs) as mathematical optimization problems. Specifically, we focus on two key problems in resource management: Sum Rate Maximization and Maximization of Number of Admitted Users. Since both the above mentioned problems are NP hard due to presence of binary assignment variables, we propose novel graph based algorithms to optimally solve these problems. Further, we analyze the impact of location awareness on network performance of CRNs by considering three cases: Full location Aware, Partial location Aware and Non location Aware. Our results clearly show that location awareness has significant impact on performance of overlaid CRNs and leads to increase in spectrum utilization effciency.

MODELING AND PROTOCOL DESIGN FOR EMERGING WIRELESS SYSTEMS

Mobile Mesh Network based In-Transit Visibility (MMN-ITV) system facilitates global real-time tracking capability for the logistics system. In-transit containers form a multi-hop mesh network to forward the tracking information to the nearby sinks, which further deliver the information to the remote control center via satellite. The fundamental challenge to the MMN-ITV system is the energy constraint of the battery-operated containers. Coupled with the unique mobility pattern, cross-MMN behavior, and the large-spanned area, it is necessary to investigate the energy-efficient communication of the MMN-ITV system thoroughly. First of all, this dissertation models the energy-efficient routing under the unique pattern of the cross-MMN behavior. A new modeling approach, pseudo-dynamic modeling approach, is proposed to measure the energy-efficiency of the routing methods in the presence of the cross-MMN behavior. With this approach, it could be identified that the shortest-path routing and the load-balanced routing is energy-efficient in mobile networks and static networks respectively. For the MMN-ITV system with both mobile and static MMNs, an energy-efficient routing method, energy-threshold routing, is proposed to achieve the best tradeoff between them. Secondly, due to the cross-MMN behavior, neighbor discovery is executed frequently to help the new containers join the MMN, hence, consumes similar amount of energy as that of the data communication. By exploiting the unique pattern of the cross-MMN behavior, this dissertation proposes energy-efficient neighbor discovery wakeup schedules to save up to 60% of the energy for neighbor discovery. Vehicular Ad Hoc Networks (VANETs)-based inter-vehicle communications is by now growingly believed to enhance traffic safety and transportation management with low cost. The end-to-end delay is critical for the time-sensitive safety applications in VANETs, and can be a decisive performance metric for VANETs. This dissertation presents a complete analytical model to evaluate the end-to-end delay against the transmission range and the packet arrival rate. This model illustrates a significant end-to-end delay increase from non-saturated networks to saturated networks. It hence suggests that the distributed power control and admission control protocols for VANETs should aim at improving the real-time capacity (the maximum packet generation rate without causing saturation), instead of the delay itself. Based on the above model, it could be determined that adopting uniform transmission range for every vehicle may hinder the delay performance improvement, since it does not allow the coexistence of the short path length and the low interference. Clusters are proposed to configure non-uniform transmission range for the vehicles. Analysis and simulation confirm that such configuration can enhance the real-time capacity. In addition, it provides an improved trade off between the end-to-end delay and the network capacity. A distributed clustering protocol with minimum message overhead is proposed, which achieves low convergence time.