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.

What Price Social and Health Care? Commodities, Competition and Consumers

In this paper we explore some important disputes and problems surrounding the legal status and social purpose of Health

Price Delegation in Sales Organizations: An Empirical Investigation

The allocation of decision rights is an integral component of designing organizational architecture. Economists have long understood the importance of co-locating decision rights with the knowledge that is valuable to those decisions. Following this prescription, marketing scholars have developed strong theoretical arguments in favor of delegating pricing authority to the sales force. Empirical work, however, reveals a significant number of sales organizations yielding only minimal authority to their salespeople. Given this divergence between theory and practice, we develop and empirically test two mitigating factors that could potentially explain why firms restrict pricing authority. We test our hypotheses on a sample of 222 German sales organizations and find that the data are generally consistent with our conceptualization.

Tariff-Specific Preferences and Their Influence on Price Sensitivity

For many services, consumers can choose among a range of optional tariffs that differ in their access and usage prices. Recent studies indicate that tariff-specific preferences may lead consumers to choose a tariff that does not minimize their expected billing rate. This study analyzes how tariff-specific preferences influence the responsiveness of consumers’ usage and tariff choice to changes in price. We show that consumer heterogeneity in tariff-specific preferences leads to heterogeneity in their sensitivity to price changes. Specifically, consumers with tariff-specific preferences are less sensitive to price increases of their preferred tariff than other consumers. Our results provide an additional reason why firms should offer multiple tariffs rather than a uniform nonlinear pricing plan to extract maximum consumer surplus.

Target Price Accuracy

This study analyzes the accuracy of forecasted target prices within analysts’ reports. We compute a measure for target price forecast accuracy that evaluates the ability of analysts to exactly forecast the ex-ante (unknown) 12-month stock price. Furthermore, we determine factors that explain this accuracy. Target price accuracy is negatively related to analyst-specific optimism and stock-specific risk (measured by volatility and price-to-book ratio). However, target price accuracy is positively related to the level of detail of each report, company size and the reputation of the investment bank. The potential conflicts of interests between an analyst and a covered company do not bias forecast accuracy.

Cost-effectiveness of percutaneous coronary intervention in patients with stable coronary artery disease and abnormal fractional flow reserve

BACKGROUND The Fractional Flow Reserve Versus Angiography for Multivessel Evaluation (FAME) 2 trial demonstrated a significant reduction in subsequent coronary revascularization among patients with stable angina and at least 1 coronary lesion with a fractional flow reserve ≤0.80 who were randomized to percutaneous coronary intervention (PCI) compared with best medical therapy. The economic and quality-of-life implications of PCI in the setting of an abnormal fractional flow reserve are unknown. METHODS AND RESULTS We calculated the cost of the index hospitalization based on initial resource use and follow-up costs based on Medicare reimbursements. We assessed patient utility using the EQ-5D health survey with US weights at baseline and 1 month and projected quality-adjusted life-years assuming a linear decline over 3 years in the 1-month utility improvements. We calculated the incremental cost-effectiveness ratio based on cumulative costs over 12 months. Initial costs were significantly higher for PCI in the setting of an abnormal fractional flow reserve than with medical therapy ($9927 versus $3900, P<0.001), but the $6027 difference narrowed over 1-year follow-up to $2883 (P<0.001), mostly because of the cost of subsequent revascularization procedures. Patient utility was improved more at 1 month with PCI than with medical therapy (0.054 versus 0.001 units, P<0.001). The incremental cost-effectiveness ratio of PCI was $36 000 per quality-adjusted life-year, which was robust in bootstrap replications and in sensitivity analyses. CONCLUSIONS PCI of coronary lesions with reduced fractional flow reserve improves outcomes and appears economically attractive compared with best medical therapy among patients with stable angina.

The price elasticity of demand for common stock

We study the price elasticity of demand for the common stock of an individual corporation. Despite the prevelance of assumptions that demand is perfectly elastic, there is little if any direct evidence in the literature to either support or reject that contention. Consistent with the notion of finite price elasticities, we find that the announcement of primary stock oferings by regulated firms depresses their stock prices and little if any evidence that this decline is the result of adverse information about future cash flows. Attempts to relate offer announcement effects directly to possible determinants of price elasticities, however, are inconclusive.

Rotation Grazing Demonstrations With Beef Cows on HEL - Adams County Conservation Reserve Program (CRP) Project

Two grazing systems were demonstrated on Conservation Reserve Program (CRP) land in southwestern Iowa near Corning in the summers of 1991, 1992, 1993, 1994, and 1995. This report summarizes the 1995 data and compares them to results from the four previous years. The systems, a 13-paddock intensive-rotational grazing system and a 4-paddock more traditional rotation, both established in 1991, are aimed at showing economically sustainable grass alternatives for steeply sloping (9-14% slope), highly erodible land (HEL) once the 10-year CRP ends. In a 147-day grazing season in 1995, nursing crossbred calves with no creep gained 2.36 pounds and 2.38 pounds per day on the 13- and 4-paddock systems, respectively. The rotations were stocked at 1.65 acres per cow-calf pair on the 13-paddock system and 1.72 acres per pair on the 4-paddock system. This produced 210.2 pounds of calf gain per acre on the 13-paddock system and 203.2 pounds of calf gain per acre on the 4- paddock system.. Similar calves gained 2.37 pounds and 2.50 pounds per day for 155 days, yielding a total gain per acre of 222.7 pounds on the 13-paddock system and 224.9 pounds on the 4-paddock system in 1994. Results for 1992 remain the highest from both systems in the five years of grazing, with calf gain per head per day at 2.45 for 155 days netting 241.9 pounds per acre on the 13- paddock system and calf gain per head per day at 2.38 for 154 days on the 4-paddock system yielding 263.6 pounds per acre. Cows maintained both their weight and condition scores in both systems again in 1995. A third system, the 18-paddock intensive-rotational grazing system, was stocked with stocker steers in 1995, and the results are reported in a second article in the 1996 ISU Beef Research Report entitled “Intensive- Rotational Grazing Steers on Highly Erodible Land at the Adams County CRP Project.” Concerning grazing management, paddocks were grazed four, five, or six times in the 13-paddock intensive- rotational grazing system during the 147-day grazing season of 1995. This number of times grazed per paddock was nearly equal to times grazed per paddock in 1994. However, several paddocks were subdivided temporarily to equalize paddock size and increase grazing uniformity. This increased the total number of cattle moves in the 13-paddock system from 78 in 1994 to 109 in 1995. The average length of stay on each paddock or subdivision of a paddock per grazing time was 1 to 2.2 days. This was less than in any of the other four grazing years in this project. The principle of not grazing more than half the standing forage during any one grazing period was closely followed in 1995. All paddocks in the 13-paddock system were also rested approximately the recommended 30 days between each grazing cycle in 1995.