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).

Adapting health-risk communication to the specific cultural contexts of diverse populations : an assessment of malaria-treatment programs in Liberia

Drawing on theories of technical communication, rhetoric, literacy, language and culture, and medical anthropology, this dissertation explores how local culture and traditions can be incorporated into health-risk-communication-program design and implementation, including the design and dissemination of health-risk messages. In a modern world with increasing global economic partnerships, mounting health and environmental risks, and cross-cultural collaborations, those who interact with people of different cultures have “a moral obligation to take those cultures seriously, including their social organization and values” (Hahn and Inhorn 10). Paradoxically, at the same time as we must carefully adapt health, safety, and environmental-risk messages to diverse cultures and populations, we must also recognize the increasing extent to which we are all becoming part of one, vast, interrelated global village. This, too, has a significant impact on the ways in which healthcare plans should be designed, communicated, and implemented. Because communicating across diverse cultures requires a system for “bridging the gap between individual differences and negotiating individual realities” (Kim and Gudykunst 50), both administrators and beneficiaries of malaria-treatment-and-control programs (MTCPs) in Liberia were targeted to participate in this study. A total of 105 people participated in this study: 21 MTCP administrators (including designers and implementers) completed survey questionnaires on program design, implementation, and outcomes; and 84 MTCP beneficiaries (e.g., traditional leaders and young adults) were interviewed about their knowledge of malaria and methods for communicating health risks in their tribe or culture. All participants showed a tremendous sense of courage, commitment, resilience, and pragmatism, especially in light of the fact that many of them live and work under dire socioeconomic conditions (e.g., no electricity and poor communication networks). Although many MTCP beneficiaries interviewed for this study had bed nets in their homes, a majority (46.34 percent) used a combination of traditional herbal medicine and Western medicine to treat malaria. MTCP administrators who participated in this study rated the impacts of their programs on reducing malaria in Liberia as moderately successful (61.90 percent) or greatly successful (38.10 percent), and they offered a variety of insights on what they might do differently in the future to incorporate local culture and traditions into program design and implementation. Participating MTCP administrators and beneficiaries differed in their understanding of what “cultural incorporation” meant, but they agreed that using local indigenous languages to communicate health-risk messages was essential for effective health-risk communication. They also suggested that understanding the literacy practices and linguistic cultures of the local people is essential to communicating health risks across diverse cultures and populations.

HEALTH AND SAFETY ISSUES IN THE WORKPLACE: THE CASE OF CAMEROON TEA ESTATE (CTE), A RISK COMMUNICATION APPROACH

In 2002, motivated largely by the uncontested belief that the private sector would operate more efficiently than the government, the government of Cameroon initiated a major effort to privatize some of Cameroon’s largest, state-run industries. One of the economic sectors affected by this privatization was tea production. In October 2002, the Cameroon Tea Estate (CTE), a privately owned, tea-cultivating organization, bought the Tole Tea Estate from the Cameroon Development Corporation (CDC), a government-owned entity. This led to an increase in the quantity of tea production; however, the government and CTE management appear not to have fully considered the risks of privatization. Using classical rhetorical theory, Richard Weaver’s conception of “god terms” (or “uncontested terms”), and John Ikerd’s ethical approach to risk communication, this study examines risks to which Tole Tea Estate workers were exposed and explores rhetorical strategies that workers employed in expressing their discontent. Sources for this study include online newspapers, which were selected on the basis of their reputation and popularity in Cameroon. Analysis of the data shows that, as a consequence of privatization, Tole Tea Estate workers were exposed to three basic risks: marginalization, unfulfilled promises, and poor working conditions. Workers’ reactions to these risks tended to grow more emotional as management appeared to ignore their demands. The study recommends that respect for labor law, constructive dialogue among stakeholders, and transparency might serve as guiding principles in responding to the politics of privatization in developing countries.