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.

Probabilistic-based hurricane risk assessment and mitigation considering the potential impacts of climate change

Studies are suggesting that hurricane hazard patterns (e.g. intensity and frequency) may change as a consequence of the changing global climate. As hurricane patterns change, it can be expected that hurricane damage risks and costs may change as a result. This indicates the necessity to develop hurricane risk assessment models that are capable of accounting for changing hurricane hazard patterns, and develop hurricane mitigation and climatic adaptation strategies. This thesis proposes a comprehensive hurricane risk assessment and mitigation strategies that account for a changing global climate and that has the ability of being adapted to various types of infrastructure including residential buildings and power distribution poles. The framework includes hurricane wind field models, hurricane surge height models and hurricane vulnerability models to estimate damage risks due to hurricane wind speed, hurricane frequency, and hurricane-induced storm surge and accounts for the timedependant properties of these parameters as a result of climate change. The research then implements median insured house values, discount rates, housing inventory, etc. to estimate hurricane damage costs to residential construction. The framework was also adapted to timber distribution poles to assess the impacts climate change may have on timber distribution pole failure. This research finds that climate change may have a significant impact on the hurricane damage risks and damage costs of residential construction and timber distribution poles. In an effort to reduce damage costs, this research develops mitigation/adaptation strategies for residential construction and timber distribution poles. The costeffectiveness of these adaptation/mitigation strategies are evaluated through the use of a Life-Cycle Cost (LCC) analysis. In addition, a scenario-based analysis of mitigation strategies for timber distribution poles is included. For both residential construction and timber distribution poles, adaptation/mitigation measures were found to reduce damage costs. Finally, the research develops the Coastal Community Social Vulnerability Index (CCSVI) to include the social vulnerability of a region to hurricane hazards within this hurricane risk assessment. This index quantifies the social vulnerability of a region, by combining various social characteristics of a region with time-dependant parameters of hurricanes (i.e. hurricane wind and hurricane-induced storm surge). Climate change was found to have an impact on the CCSVI (i.e. climate change may have an impact on the social vulnerability of hurricane-prone regions).

AN EXPERIMENTAL STUDY OF PARTIAL LOW RISK DEPLOYMENT IN A FIXED VEHICLE ENVIRONMENT

This study will look at the passenger air bag (PAB) performance in a fix vehicle environment using Partial Low Risk Deployment (PLRD) as a strategy. This development will follow test methods against actual baseline vehicle data and Federal Motor Vehicle Safety Standards 208 (FMVSS 208). FMVSS 208 states that PAB compliance in vehicle crash testing can be met using one of three deployment methods. The primary method suppresses PAB deployment, with the use of a seat weight sensor or occupant classification sensor (OCS), for three-year old and six-year old occupants including the presence of a child seat. A second method, PLRD allows deployment on all size occupants suppressing only for the presents of a child seat. A third method is Low Risk Deployment (LRD) which allows PAB deployment in all conditions, all statures including any/all child seats. This study outlines a PLRD development solution for achieving FMVSS 208 performance. The results of this study should provide an option for system implementation including opportunities for system efficiency and other considerations. The objective is to achieve performance levels similar too or incrementally better than the baseline vehicles National Crash Assessment Program (NCAP) Star rating. In addition, to define systemic flexibility where restraint features can be added or removed while improving occupant performance consistency to the baseline. A certified vehicles’ air bag system will typically remain in production until the vehicle platform is redesigned. The strategy to enable the PLRD hypothesis will be to first match the baseline out of position occupant performance (OOP) for the three and six-year old requirements. Second, improve the 35mph belted 5th percentile female NCAP star rating over the baseline vehicle. Third establish an equivalent FMVSS 208 certification for the 25mph unbelted 50th percentile male. FMVSS 208 high-speed requirement defines the federal minimum crash performance required for meeting frontal vehicle crash-test compliance. The intent of NCAP 5-Star rating is to provide the consumer with information about crash protection, beyond what is required by federal law. In this study, two vehicles segments were used for testing to compare and contrast to their baseline vehicles performance. Case Study 1 (CS1) used a cross over vehicle platform and Case Study 2 (CS2) used a small vehicle segment platform as their baselines. In each case study, the restraints systems were from different restraint supplier manufactures and each case contained that suppliers approach to PLRD. CS1 incorporated a downsized twins shaped bag, a carryover inflator, standard vents, and a strategic positioned bag diffuser to help disperse the flow of gas to improve OOP. The twin shaped bag with two segregated sections (lobes) to enabled high-speed baseline performance correlation on the HYGE Sled. CS2 used an A-Symmetric (square shape) PAB with standard size vents, including a passive vent, to obtain OOP similar to the baseline. The A-Symmetric shape bag also helped to enabled high-speed baseline performance improvements in HYGE Sled testing in CS2. The anticipated CS1 baseline vehicle-pulse-index (VPI) target was in the range of 65-67. However, actual dynamic vehicle (barrier) testing was overshadowed with the highest crash pulse from the previous tested vehicles with a VPI of 71. The result from the 35mph NCAP Barrier test was a solid 4-Star (4.7 Star) respectfully. In CS2, the vehicle HYGE Sled development VPI range, from the baseline was 61-62 respectively. Actual NCAP test produced a chest deflection result of 26mm versus the anticipated baseline target of 12mm. The initial assessment of this condition was thought to be due to the vehicles significant VPI increase to 67. A subsequent root cause investigation confirmed a data integrity issue due to the instrumentation. In an effort to establish a true vehicle test data point a second NCAP test was performed but faced similar instrumentation issues. As a result, the chest deflect hit the target of 12.1mm; however a femur load spike, similar to the baseline, now skewed the results. With noted level of performance improvement in chest deflection, the NCAP star was assessed as directional for 5-Star capable performance. With an actual rating of 3-Star due to instrumentation, using data extrapolation raised the ratings to 5-Star. In both cases, no structural changes were made to the surrogate vehicle and the results in each case matched their perspective baseline vehicle platforms. These results proved the PLRD is viable for further development and production implementation.