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.

Game-theoretic view on intermediated exchange

Intermediaries permeate modern economic exchange. Most classical models on intermediated exchange are driven by information asymmetry and inventory management. These two factors are of reduced significance in modern economies. This makes it necessary to develop models that correspond more closely to modern financial marketplaces. The goal of this dissertation is to propose and examine such models in a game theoretical context. The proposed models are driven by asymmetries in the goals of different market participants. Hedging pressure as one of the most critical aspects in the behavior of commercial entities plays a crucial role. The first market model shows that no equilibrium solution can exist in a market consisting of a commercial buyer, a commercial seller and a non-commercial intermediary. This indicates a clear economic need for non-commercial trading intermediaries: a direct trade from seller to buyer does not result in an equilibrium solution. The second market model has two distinct intermediaries between buyer and seller: a spread trader/market maker and a risk-neutral intermediary. In this model a unique, natural equilibrium solution is identified in which the supply-demand surplus is traded by the risk-neutral intermediary, whilst the market maker trades the remainder from seller to buyer. Since the market maker’s payoff for trading at the identified equilibrium price is zero, this second model does not provide any motivation for the market maker to enter the market. The third market model introduces an explicit transaction fee that enables the market maker to secure a positive payoff. Under certain assumptions on this transaction fee the equilibrium solution of the previous model applies and now also provides a financial motivation for the market maker to enter the market. If the transaction fee violates an upper bound that depends on supply, demand and riskaversity of buyer and seller, the market will be in disequilibrium.

Cortical local and long-range synchronization interplay in human absence seizure initiation

Brain activity relies on transient, fluctuating interactions between segregated neuronal populations. Synchronization within a single and between distributed neuronal clusters reflects the dynamics of these cooperative patterns. Thus absence epilepsy can be used as a model for integrated, large-scale investigation of the emergence of pathological collective dynamics in the brain. Indeed, spike-wave discharges (SWD) of an absence seizure are thought to reflect abnormal cortical hypersynchronization. In this paper, we address two questions: how and where do SWD arise in the human brain? Therefore, we explored the spatio-temporal dynamics of interactions within and between widely distributed cortical sites using magneto-encephalographic recordings of spontaneous absence seizures. We then extracted, from their time-frequency analysis, local synchronization of cortical sources and long-range synchronization linking distant sites. Our analyses revealed a reproducible sequence of 1) long-range desynchronization, 2) increased local synchronization and 3) increased long-range synchronization. Although both local and long-range synchronization displayed different spatio-temporal profiles, their cortical projection within an initiation time window overlap and reveal a multifocal fronto-central network. These observations contradict the classical view of sudden generalized synchronous activities in absence epilepsy. Furthermore, they suggest that brain states transition may rely on multi-scale processes involving both local and distant interactions.

Why Death Matters: Understanding Gameworld Experience

This article presents a study of the staging and implementation of death and the death penalty in a number of popular MMOGs and relates it to players general experience of gameworlds. Game mechanics, writings and stories by designers and players, and the results of an online survey are analysed and discussed. The study shows that the death penalty is implemented much in the same way across worlds; that death can be both trivial and non-trivial, part of the grind of everyday life, or essential in the creation of heroes, depending on context. In whatever function death may serves, it is argued that death plays an important part in the shaping and emergence of the social culture of a world, and in the individual players experience of life within it.

Video Search: New Challenges in the Pervasive Digital Video Era

The explosion of multimedia digital content and the development of technologies that go beyond traditional broadcast and TV have rendered access to such content important for all end-users of these technologies. While originally developed for providing access to multimedia digital libraries, video search technologies assume now a more demanding role. In this paper, we attempt to shed light onto this new role of video search technologies, looking at the rapid developments in the related market, the lessons learned from state of art video search prototypes developed mainly in the digital libraries context and the new technological challenges that have risen. We focus on one of the latter, i.e., the development of cross-media decision mechanisms, drawing examples from REVEAL THIS, an FP6 project on the retrieval of video and language for the home user. We argue, that efficient video search holds a key to the usability of the new ”pervasive digital video” technologies and that it should involve cross-media decision mechanisms.

Video Composer and Live Video Conductor: Future Professions for the Interactive Digital Broadcasting Industry

Innovations in hardware and network technologies lead to an exploding number of non-interrelated parallel media streams. Per se this does not mean any additional value for consumers. Broadcasting and advertisement industries have not yet found new formats to reach the individual user with their content. In this work we propose and describe a novel digital broadcasting framework, which allows for the live staging of (mass) media events and improved consumer personalisation. In addition new professions for future TV production workflows which will emerge are described, namely the 'video composer' and the 'live video conductor'.