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.

Ethanol Production from Hardboard Manufacturing Process Wastewater: Methods for Improving Product Yields from Hemicellulose Hydrolysates

Waste effluents from the forest products industry are sources of lignocellulosic biomass that can be converted to ethanol by yeast after pretreatment. However, the challenge of improving ethanol yields from a mixed pentose and hexose fermentation of a potentially inhibitory hydrolysate still remains. Hardboard manufacturing process wastewater (HPW) was evaluated at a potential feedstream for lignocellulosic ethanol production by native xylose-fermenting yeast. After screening of xylose-fermenting yeasts, Scheffersomyces stipitis CBS 6054 was selected as the ideal organism for conversion of the HPW hydrolysate material. The individual and synergistic effects of inhibitory compounds present in the hydrolysate were evaluated using response surface methodology. It was concluded that organic acids have an additive negative effect on fermentations. Fermentation conditions were also optimized in terms of aeration and pH. Methods for improving productivity and achieving higher ethanol yields were investigated. Adaptation to the conditions present in the hydrolysate through repeated cell sub-culturing was used. The objectives of this present study were to adapt S. stipitis CBS6054 to a dilute-acid pretreated lignocellulosic containing waste stream; compare the physiological, metabolic, and proteomic profiles of the adapted strain to its parent; quantify changes in protein expression/regulation, metabolite abundance, and enzyme activity; and determine the biochemical and molecular mechanism of adaptation. The adapted culture showed improvement in both substrate utilization and ethanol yields compared to the unadapted parent strain. The adapted strain also represented a growth phenotype compared to its unadapted parent based on its physiological and proteomic profiles. Several potential targets that could be responsible for strain improvement were identified. These targets could have implications for metabolic engineering of strains for improved ethanol production from lignocellulosic feedstocks. Although this work focuses specifically on the conversion of HPW to ethanol, the methods developed can be used for any feedstock/product systems that employ a microbial conversion step. The benefit of this research is that the organisms will the optimized for a company's specific system.

CRITERIA FOR SUSTAINABLE PRODUCT DESIGN WITH 3D PRINTING IN THE DEVELOPING WORLD

The demand for consumer goods in the developing world continues to rise as populations and economies grow. As designers, manufacturers, and consumers look for ways to address this growing demand, many are considering the possibilities of 3D printing. Due to 3D printing’s flexibility and relative mobility, it is speculated that 3D printing could help to meet the growing demands of the developing world. While the merits and challenges of distributed manufacturing with 3D printing have been presented, little work has been done to determine the types of products that would be appropriate for such manufacturing. Inspired by the author’s two years of Peace Corps service in the Tanzania and the need for specialty equipment for various projects during that time, an in-depth literature search is undertaken to better understand and summarize the process and capabilities of 3D printing. Human-centered design considerations are developed to focus on the product desirability, the technical feasibility, and the financial viability of using 3D printing within Tanzania. Beginning with concerns of what Tanzanian consumers desire, many concerns later arise in regards to the feasibility of creating products that would be sufficient in strength and quality for the demands of developing world consumers. It is only after these concerns are addressed that the viability of products can be evaluated from an economic perspective. The larger impacts of a product beyond its use are vital in determining how it will affect the social, economic, and environmental well-being of a developing nation such as Tanzania. Thus technology specific criteria are necessary for assessing and quantifying the broader impacts that a 3D-printed product can have within its ecosystem, and appropriate criteria are developed for this purpose. Both sets of criteria are then demonstrated and tested while evaluating the desirability, feasibility, viability, and sustainability of printing a piece of equipment required for the author’s Peace Corps service: a set of Vernier calipers. Required for science educators throughout the country, specialty equipment such as calipers initially appear to be an ideal candidate for 3D printing, though ultimately the printing of calipers is not recommended due to current restrictions in the technology. By examining more specific challenges and opportunities of the products 3D printing can produce, it can be better determined what place 3D printing will have in manufacturing for the developing world. Furthermore, the considerations outlined in this paper could be adapted for other manufacturing technologies and regions of the world, as human centered design and sustainability will be critical in determining how to supply the developing world with the consumer goods it demands.