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.

Federal and state policy influence on woody biomass utilization

A considerable portion of public lands in the United States is at risk of uncharacteristically severe wildfires due to a history of fire suppression. Wildfires already have detrimental impacts on the landscape and on communities in the wildland-urban interface (WUI) due to unnatural and overstocked forests. Strategies to mitigate wildfire risk include mechanical thinning and prescribed burning in areas with high wildfire risk. The material removed is often of little or no economic value. Woody biomass utilization (WBU) could offset the costs of hazardous fuel treatments if removed material could be used for wood products, heat, or electricity production. However, barriers due to transportation costs, removal costs, and physical constraints (such as steep slopes) hinder woody biomass utilization. Various federal and state policies attempt to overcome these barriers. WBU has the potential to aid in wildfire mitigation and meet growing state mandates for renewable energy. This research utilizes interview data from individuals involved with on-the-ground woody biomass removal and utilization to determine how federal and state policies influence woody biomass utilization. Results suggest that there is not one over-arching policy that hinders or promotes woody biomass utilization, but rather woody biomass utilization is hindered by organizational constraints related to time, cost, and quality of land management agencies’ actions. However, the use of stewardship contracting (a hybrid timber sale and service contract) shows promise for increased WBU, especially in states with favorable tax policies and renewable energy mandates. Policy recommendations to promote WBU include renewal of stewardship contracting legislations and a re-evaluation of land cover types suited for WBU. Potential future policies to consider include the indirect role of carbon dioxide emission reduction activities to promote wood energy and future impacts of air quality regulations.

Afghanistan connection : heroin production, distribution, and consumption

Heroin prices are a reflection of supply and demand, and similar to any other market, profits motivate participation. The intent of this research is to examine the change in Afghan opium production due to political conflict affecting Europe’s heroin market and government policies. If the Taliban remain in power, or a new Afghan government is formed, the changes will affect the heroin market in Europe to a certain degree. In the heroin market, the degree of change is dependent on many socioeconomic forces such as law enforcement, corruption, and proximity to Afghanistan. An econometric model that examines the degree of these socioeconomic effects has not been applied to the heroin trade in Afghanistan before. This research uses a two-stage least squares econometric model to reveal the supply and demand of heroin in 36 different countries from the Middle East to Western Europe in 2008. An application of the two-stage least squares model to the heroin market in Europe will attempt to predict the socioeconomic consequences of Afghanistan opium production.

Financial decision making about found oil and gas in Ghana : real options vs. traditional methods

This research is a study of the use of capital budgeting methods for investment decisions. It uses both the traditional methods and the newly introduced approach called the real options analysis to make a decision. The research elucidates how capital budgeting can be done when analysts encounter projects with high uncertainty and are capital intensive, for example oil and gas production. It then uses the oil and gas find in Ghana as a case study to support its argument. For a clear understanding a thorough literature review was done, which highlights the advantages and disadvantages of both methods. The revenue that the project will generate and the costs of production were obtained from the predictions by analysts from GNPC and compared to others experts’ opinion. It then applied both the traditional and real option valuation on the oil and gas find in Ghana to determine the project’s feasibility. Although, there are some short falls in real option analysis that are presented in this research, it is still helpful in valuing projects that are capital intensive with high volatility due to the strategic flexibility management possess in their decision making. It also suggests that traditional methods of evaluation should still be maintained and be used to value projects that have no options or those with options yet the options do not have significant impact on the project. The research points out the economic ripples the production of oil and gas will have on Ghana’s economy should the project be undertaken. These ripples include economic growth, massive job creation and reduction of the balance of trade deficit for the country. The long run effect is an eventually improvement of life of the citizens. It is also belief that the production of gas specifically can be used to generate electricity in Ghana which would enable the country to have a more stable and reliable power source necessary to attract more foreign direct investment.

Car ownership modeling and forecasts for China

A great increase of private car ownership took place in China from 1980 to 2009 with the development of the economy. To explain the relationship between car ownership and economic and social changes, an ordinary least squares linear regression model is developed using car ownership per capita as the dependent variable with GDP, savings deposits and highway mileages per capita as the independent variables. The model is tested and corrected for econometric problems such as spurious correlation and cointegration. Finally, the regression model is used to project oil consumption by the Chinese transportation sector through 2015. The result shows that about 2.0 million barrels of oil will be consumed by private cars in conservative scenario, and about 2.6 million barrels of oil per day in high case scenario in 2015. Both of them are much higher than the consumption level of 2009, which is 1.9 million barrels per day. It also shows that the annual growth rate of oil demand by transportation is 2.7% - 3.1% per year in the conservative scenario, and 6.9% - 7.3% per year in the high case forecast scenario from 2010 to 2015. As a result, actions like increasing oil efficiency need to be taken to deal with challenges of the increasing demand for oil.

Economic viability of shale gas production in the Marcellus Shale; indicated by production rates, costs and current natural gas prices

The U.S. natural gas industry has changed because of the recent ability to produce natural gas from unconventional shale deposits. One of the largest and most important deposits is the Marcellus Shale. Hydraulic fracturing and horizontal drilling have allowed for the technical feasibility of production, but concerns exist regarding the economics of shale gas production. These concerns are related to limited production and economic data for shale gas wells, declines in the rates of production, falling natural gas prices, oversupply issues coupled with slow growth in U.S. natural gas demand, and rising production costs. An attempt to determine profitability was done through the economic analysis of an average shale gas well using data that is representative of natural gas production from 2009 to 2011 in the Marcellus Shale. Despite the adverse conditions facing the shale gas industry it is concluded from the results of this analysis that a shale gas well in the Marcellus Shale is profitable based on NPV, IRR and breakeven price calculations.

Perceptions of water conditions and management in the Sonora River Basin, Sonora, Mexico

The effects of climate change are expected to be very severe in arid regions. The Sonora River Basin, in the northwestern state of Sonora, Mexico, is likely to be severely affected. Some of the anticipated effects include precipitation variability, intense storm events, higher overall temperatures, and less available water. In addition, population in Sonora, specifically the capital city of Hermosillo, is increasing at a 1.5% rate and current populations are near 700,000. With the reduction in water availability and an increase in population, Sonora, Mexico is expected to experience severe water resource issues in the near future. In anticipation of these changes, research is being conducted in an attempt to improve water management in the Sonora River Basin, located in the northwestern part of Sonora. This research involves participatory modeling techniques designed to increase water manager awareness of hydrological models and their use as integrative tools for water resource management. This study was conducted as preliminary research for the participatory modeling grant in order to gather useful information on the population being studied. This thesis presents research from thirty-four in-depth interviews with water managers, citizens, and agricultural producers in Sonora, Mexico. Data was collected on perceptions of water quantity and quality in the basin, thoughts on current water management practices, perceptions of climate change and its management, experience with, knowledge of, and trust in hydrological models as water management tools. Results showed that the majority of interviewees thought there was not enough water to satisfy their daily needs. Most respondents also agreed that the water available was of good quality, but that current management of water resources was ineffective. Nearly all interviewees were aware of climate change and thought it to be anthropogenic. May reported experiencing higher temperatures, precipitation changes, and higher water scarcity and attributed those fluctuations to climate change. 65% of interviewees were at least somewhat familiar with hydrological models, though only 28% had ever used them or their output. Even with model usage results being low, 100% of respondents believed hydrological models to be very useful water management tools. Understanding how water, climate change, and hydrological models are perceived by this population of people is essential to improving their water management practices in the face of climate change.

Reflection, refraction, and rejection : copper smelting heritage and the execution of environmental policy

This dissertation examines the global technological and environmental history of copper smelting and the conflict that developed between historic preservation and environmental remediation at major copper smelting sites in the United States after their productive periods ended. Part I of the dissertation is a synthetic overview of the history of copper smelting and its environmental impact. After reviewing the basic metallurgy of copper ores, the dissertation contains successive chapters on the history of copper smelting to 1640, culminating in the so-called German, or Continental, processing system; on the emergence of the rival Welsh system during the British industrial revolution; and on the growth of American dominance in copper production the late 19th and early 20th centuries. The latter chapter focuses, in particular, on three of the most important early American copper districts: Michigan’s Keweenaw Peninsula, Tennessee’s Copper Basin, and Butte-Anaconda, Montana. As these three districts went into decline and ultimately out of production, they left a rich industrial heritage and significant waste and pollution problems generated by increasingly more sophisticated technologies capable of commercially processing steadily growing volumes of decreasingly rich ores. Part II of the dissertation looks at the conflict between historic preservation and environmental remediation that emerged locally and nationally in copper districts as they went into decline and eventually ceased production. Locally, former copper mining communities often split between those who wished to commemorate a region’s past importance and develop heritage tourism, and local developers who wished to clear up and clean out old industrial sites for other purposes. Nationally, Congress passed laws in the 1960s and 1970s mandating the preservation of historical resources (National Historic Preservation Act) and laws mandating the cleanup of contaminated landscapes (CERCLA, or Superfund), objectives sometimes in conflict – especially in the case of copper smelting sites. The dissertation devotes individual chapters to the conflicts that developed between environmental remediation, particularly involving the Environmental Protection Agency and the heritage movement in the Tennessee, Montana, and Michigan copper districts. A concluding chapter provides a broad model to illustrate the relationship between industrial decline, federal environmental remediation activities, and the growth of heritage consciousness in former copper mining and smelting areas, analyzes why the outcome varied in the three areas, and suggests methods for dealing with heritage-remediation issues to minimize conflict and maximize heritage preservation.

Arctic network builders : the Arctic Coal Company's operations on Spitsbergen and its relationship with the environment

In 1906, two American industrialists, John Munroe Longyear and Frederick Ayer, formed the Arctic Coal Company to make the first large scale attempt at mining in the high-Arctic location of Spitsbergen, north of the Norwegian mainland. In doing so, they encountered numerous obstacles and built an organization that attempted to overcome them. The Americans sold out in 1916 but others followed, eventually culminating in the transformation of a largely underdeveloped landscape into a mining region. This work uses John Law’s network approach of the Actor Network Theory (ANT) framework to explain how the Arctic Coal Company built a mining network in this environmentally difficult region and why they made the choices they did. It does so by identifying and analyzing the problems the company encountered and the strategies they used to overcome them by focusing on three major components of the operations; the company’s four land claims, its technical system and its main settlement, Longyear City. Extensive comparison between aspects of Longyear City and the company’s choices of technology with other American examples place analysis of the company in a wider context and helps isolate unique aspects of mining in the high-Arctic. American examples dominate comparative sections because Americans dominated the ownership and upper management of the company.

Balancing wildlife and bioenergy values on private forestlands in the eastern Upper Peninsula of Michigan

There is interest in developing a reliable, sustainable, domestic U.S. biofuels industry. A domestic biofuels industry has the potential to provide economic, environmental, and national security benefits on a local, regional, national, and global level. The Mascoma Corporation plans to develop a cellulosic ethanol facility in Michigan’s eastern Upper Peninsula. The primary feedstock of the plant site would be trees sourced within a 150 mile supply radius. In the eastern Upper Peninsula, this radius encompasses Alger, Chippewa, Delta, Luce, Mackinac, and Schoolcraft counties. In these six counties there are 1,320,500 acres of NIPF (non-industrial private forestlands). These acres account for 40% of the total timberland in these six counties. Thus it is likely that in order for the successful implementation of a cellulosic ethanol facility the support of local NIPF owners will be necessary. This thesis presents research on how eastern Upper Peninsula forest landowners think about and manage their land. It is based on 48 in-depth interviews with these landowners. The goal was to determine how landowner values and beliefs, on a variety of issues including wildlife management, land management, biofuels development, and climate change, are expressed through both their current management decisions, and possibly their future land management decisions. Some of the values articulated by the landowners in this study included biodiversity protection, conservation of healthy game populations, and the production of high-value timber. Understanding the values and beliefs of landowners in the eastern Upper Peninsula of Michigan is critical for successfully developing a sustainable regional woody bioenergy.

A cold blizzard was raging, but the light shone brightly' : social networks presented in stained glass within an industrial community

Historical stained glass in Calumet and Laurium revealed the complex structures of these industrial communities. Creating an Industrial Archaeology-focused approach, I examined stained glass as material culture. Sacred glass revealed ethnic and religious values of a congregation through the style, iconography, and quality of the glasswork. Residential glass showed how owners represented themselves within cultural settings by meeting social expectations. Commercial glass indicated community status of owners through discreet and artistic shows of wealth and taste. Corporate glass displayed prosperity and belonging through the superior quality and cost of the glasswork. Viewing stained glass as material culture opened new methods of looking at both stained glass and industrial communities. Findings from my research can teach the public about the importance of preserving and conserving stained glass, and that can lead to greater public appreciation for the material culture found within these industrial communities.

Technical communication in the global context : a heuristic approach to disciplinary identity and pedagogical practices

There is nothing new or original in stating that the global economy directly impacts the profession of technical communicators. The globalization of the workplace requires that technical communicators be prepared to work in increasingly linguistically and culturally diverse contexts. These new exigencies have natural repercussions on the research and educational practices of the field In this work, I draw on rhetoric, linguistics, and literacy theory to explore the definition, role and meaning of the global context for the disciplinary construction of professional and technical communication. By adopting an interdisciplinary and diachronic perspective, I assert that the global context is a heuristic means for sophisticating the disciplinary identity of the field and for reinforcing its place within the humanities. Consequently, I contend that the globalization of the workplace is a kairotic moment for underscoring the rhetorical dimension of professional and technical communication.

"Brethren upon the same level" : membership and class in Calumet's Masonic Lodge

The Keweenaw Peninsula of Upper Michigan was a ethnic conglomerate of cultures and ideas, with people attracted to the area by the mineral wealth found along the Copper Range. The center of copper mining from the mid 1860s to 1968 was in the vicinity of Calumet Township, home to the world-famous Calumet and Hecla Mining Company. The township depended on the mines and the company’s president Agassiz’s strove to make the area a “model community,” that included groups such as the Free and Accepted Masons. Men from myriad backgrounds arrived in Calumet from the British Isles, Germany, Finland, Eastern and Southern Europe and the Eastern United States. As in other communities from the time period these men formed common interest groups like Masonic Lodge 271, which received its charter in 1870. Gentlemen joined with merchants and craftsmen. They became “brethren upon the same level,” and were elevated to the status of Master Mason. This symbolic transformation within the Lodge removed the men from the “profane world” outside the sanctity of Masonry, and in the ritualistic transformation of the meeting they were reborn into Masonry’s sacred mysteries. Masonry acted as a means of moral guidance to men and gave them access to a larger social and economic community through a common connection of brotherhood. As the candidates moved through the three Blue Lodge degrees of Entered Apprentice, Fellowcraft, and Master Mason they saw each other as “brethren upon the same level” – all economic classes equal within the Masonic Lodge. To examine equality within Lodge 271, this study sorted workers into classes to allow a comparison of Lodge 271’s membership. Possibly a comparison between other lodges can be drawn from the membership. The Union Building in Calumet, MI will be examined for its role in the ritualistic transformation of Masonry as it housed Masonic activities and transformations. This transformation brought men into the lodge of brothers. While Masonry professed equality between members however, to what extent did the membership of the lodge reflect this between the brethren? To what extent did economic class determine who was made “brethren upon the same level? 1 Arthur Thurner, Calumet Copper and People: History of a Michigan Mining Community, 1864-1970 (Hancock, MI: Book Concern, 1974), 122.

Public values and perceptions of industrial heritage in the Keweenaw Peninsula, Michigan

The purpose of this research is to assess public values and perceptions concerning industrial heritage in the Keweenaw by studying visitors at an endangered mining site tour. This research presents and analyzes feedback collected directly from participants in the Cliff Mine (Michigan) archaeological field school public tour surveys in June 2011, gathers semi-structured interview data from survey participants and local experts, and synthesizes and collates both survey and interview data. As those who study heritage site visitors have found, in all outreach there is a necessity for deeper understanding of visitors for the outreach to be effective. An appropriate metric for collecting public values and opinions was created and used at the Cliff Mine archaeological field school public tours. To accomplish research goals, an opinion survey was created to collect demographic information and qualitative feedback from visitors at the Cliff Mine field school. The survey, a pre-tour and post-tour question list, found that all visitors who filled out a survey supported preservation and most were adults over 46 years of age. Most visitors were white-collar professionals, identified as local residents, and found out about the tour through the newspaper. Interview questions were constructed to supplement and expand on the visitor survey results. In addition, local experts involved in Keweenaw heritage were interviewed. All interviewees supported heritage preservation but often had conflicting views when activities such as mineral collecting were factored into the preservation question. By analyzing responses to the survey and interviews, improvements to outreach efforts at the Cliff Mine are recommended. Future research should further explore perceptions of social class and identity, and should seek out stakeholders not contacted through this research, in order to improve outreach and include all community groups.

Winning coal at 78° North : mining, contingency and the Chaîne Opératoire in old Longyear City

The purpose of this thesis is to analyze the evolution of an early 20th century mining system in Spitsbergen as applied by Boston-based Arctic Coal Company (ACC). This analysis will address the following questions: Did the system evolve in a linear, technological-based fashion? Or was the progression more a product of interactions and negotiations with the natural and human landscapes present during the time of occupation? Answers to these questions will be sought through review of historical records and material residues identified during the 2008 field examination on Spitsbergen. The Arctic Coal Company’s flagship mine, ACC Mine No. 1, will serve as the focus for this analysis. The mine was the company’s largest undertaking during its occupation of Longyear Valley and today exhibits a large collection of related features and artifacts. The study will emphasize on the material record within an analysis of technical, environmental and social influences that guided the course of the mining system. The intent of this thesis is a better understanding of how a particular resource extraction industry took root in the Arctic.