3Commodity_forwards_futures

3Commodity_forwards_futures - Commodity Forwards Commodity...

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Unformatted text preview: Commodity Forwards Commodity Forwards and Futures and Futures Chapter 6 Chapter 6 Real Commodities Agricultural commodities Energy Metals Other Corn, oats Soybeans Soybean meal Soybean oil Rice, wheat Live Cattle Hogs Pork bellies Cocoa, Coffee Cotton Orange juice Sugar Crude oil Gasoline Heating oil Natural gas Propane Electricity Gold, Silver Palladium Platinum Aluminum Copper Lead Nickel Zinc Lumber Phosphate Ammonia Weather Wine Whats special about commodities? Delivery location may matter Natural gas: Henry Hub, Palo Verde Hub, COB Hub If contract is cash settled, then delivery may not matter. Storage is costly or even impossible Commodities can be productive assets. Possession of the physical commodity may be more desirable than owning a claim to the commodity. The use of oil in refineries Gold and diamonds at times of political instability The benefits of owning the physical commodity accrues to some but not all investors, e.g., speculators. The expected growth rate of the commodity price may differ from the required rate of return. 2 basic types of commodities markets: production markets or storage (carry) markets. Uses of commodity futures Hedging: Suppliers in commodity markets can hedge future sales through short forward positions. Firms that use commodities as inputs to production processes can hedge future production costs through long forward positions. Speculation Todays Agenda Theory: Commodity forward pricing Effects of commodity storage Effects of production Arbitrage in commodity markets Evidence: Futures premia and commodity storage levels Market manipulation in commodity futures markets The set of forward prices for different expiration dates is called the forward curve (or the forward strip ) for that date. If the forward curve is upward-sloping, then the market is said to be in contango . If the forward curve is downward sloping, the market is said to be in backwardation. The forward curve Section 6.1 Gold Forward Curve (US$/oz) 400 425 450 475 500 525 550 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Oil Forward Curve (US$/barrel) 60 62 64 66 68 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Commodity forward pricing Commodity forward prices can generally be described by the same (cost of carry) formula as that for financial assets. F 0, T = S e ( r ) T For financial assets, is the dividend yield. For commodities, is the return (net benefit) of owning the physical commodity. If a lease market exists then this return (net benefit) can be observed directly. Otherwise it must be estimated from forward prices. The Lease Rate Section 6.5 For some commodities a lease market exists, i.e., speculators can easily borrow the physical commodity....
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3Commodity_forwards_futures - Commodity Forwards Commodity...

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