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.

Bacteriorhodopsin protein hybrids for chemical and biological sensing

Bacteriorhodopsin (bR), an optoelectric protein found in Halobacterium salinarum, has the potential for use in protein hybrid sensing systems. Bacteriorhodopsin has no intrinsic sensing properties, however molecular and chemical tools permit production of bR protein hybrids with transducing and sensing properties. As a proof of concept, a maltose binding protein-bacteriorhodopsin ([MBP]-bR) hybrid was developed. It was proposed that the energy associated with target molecule binding, maltose, to the hybrid sensor protein would provide a means to directly modulate the electrical output from the MBP-bR bio-nanosensor platform. The bR protein hybrid is produced by linkage between bR (principal component of purified purple membrane [PM]) and MBP, which was produced by use of a plasmid expression vector system in Escherichia coli and purified utilizing an amylose affinity column. These proteins were chemically linked using 1-ethyl-3-[3-dimethylaminopropyl]carbodiimide hydrochloride (EDC) and N-hydroxysuccinimide (NHS), which facilitates formation of an amide bond between a primary carboxylic acid and a primary amine. The presence of novel protein hybrids after chemical linkage was analyzed by SDSPAGE. Soluble proteins (MBP-only derivatives and unlinked MBP) were separated from insoluble proteins (PM derivatives and unlinked PM) using size exclusion chromatography. The putatively identified MBP-bR protein hybrid, in addition to unlinked bR, was collected. This sample was normalized for bR concentration to native PM and both were deposited onto indium tin oxide (ITO) coated glass slides by electrophoretic sedimentation. The photoresponse of both samples, activated using 100 Watt tungsten lamp at 10 cm distance, were equal at 175 mV. Testing of deposited PM with 1 mM sucrose or 1 mM maltose showed no change in the photoresponse of the xiv material, however addition of 1 mM maltose to the deposited MBP-bR linked hybrid material elicited a 57% decrease in photoresponse indicating a positive response for targeting of maltose. This chemically linked MBP-bR hybrid protein, with bacteriorhodopsin, as a photoresponsive transducing substrate, shows promise for creation of a universal sensing array by attachment of other pertinent sensing materials, in lieu of the maltose binding protein utilized. This strategy would allow significant reduction in sensor size, while increasing responsiveness and sensitivity at nano and picomolar levels.