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.

Antiretroviral therapy in resource-limited settings 1996 to 2006: patient characteristics, treatment regimens and monitoring in sub-Saharan Africa, Asia and Latin America

OBJECTIVES: To describe temporal trends in baseline clinical characteristics, initial treatment regimens and monitoring of patients starting antiretroviral therapy (ART) in resource-limited settings. METHODS: We analysed data from 17 ART programmes in 12 countries in sub-Saharan Africa, South America and Asia. Patients aged 16 years or older with documented date of start of highly active ART (HAART) were included. Data were analysed by calculating medians, interquartile ranges (IQR) and percentages by regions and time periods. Not all centres provided data for 2006 and 2005 and 2006 were therefore combined. RESULTS: A total of 36,715 patients who started ART 1996-2006 were included in the analysis. Patient numbers increased substantially in sub-Saharan Africa and Asia, and the number of initial regimens declined, to four and five, respectively, in 2005-2006. In South America 20 regimes were used in 2005-2006. A combination of 3TC/D4T/NVP was used for 56% of African patients and 42% of Asian patients; AZT/3TC/EFV was used in 33% of patients in South America. The median baseline CD4 count increased in recent years, to 122 cells/microl (IQR 53-194) in 2005-2006 in Africa, 134 cells/microl (IQR 72-191) in Asia, and 197 cells/microl (IQR 61-277) in South America, but 77%, 78% and 51%, respectively, started with <200 cells/microl in 2005-2006. In all regions baseline CD4 cell counts were higher in women than men: differences were 22cells/microl in Africa, 65 cells/microl in Asia and 10 cells/microl in South America. In 2005-2006 a viral load at 6 months was available in 21% of patients Africa, 8% of Asian patients and 73% of patients in South America. Corresponding figures for 6-month CD4 cell counts were 74%, 77% and 81%. CONCLUSIONS: The public health approach to providing ART proposed by the World Health Organization has been implemented in sub-Saharan Africa and Asia. Although CD4 cell counts at the start of ART have increased in recent years, most patients continue to start with counts well below the recommended threshold. Particular attention should be paid to more timely initiation of ART in HIV-infected men.

Same Same but Different: Returning to Vietnam after 40 Years

Dan Cornell returned to Vietnam in 2012, more than 40 years after he was stationed there. From 1970-1971, Dan spent time flying around Vietnam and the neighboring countries in a large, CH-47 helicopter. There was not much time to think about what he was doing or why. In spite of this, Dan managed to become enticed bu this country so different from his own. This presentation features videos and photos from his 8-week trip.