Commodity Derivatives Markets and Applications

Chapter 1 outlines the main derivative building blocks and how they are priced. Readers familiar with these concepts could skip this chapter and go straight to any individual chapter without losing too much of the flow. However, it does include a section on the pricing of commodities within the context of the convenience yield. Chapter 2 sets the scene for a discussion on the concept of risk management. Two different perspectives are taken, that of a corporate with a desire to hedge some form of exposure and an investment bank that will take on the risk associated by offering any solution. Chapter 3 looks at the market for gold while Chapter 4 develops the theme to cover base metals. Some readers may complain that there is no coverage of other “precious” metals such as silver, platinum and palladium, but I felt that including sections on these metals would amount to overkill and that gold was sufficiently interesting in itself to warrant an extended discussion. The next three chapters cover the core energy markets, the first of which is crude oil. Chapter 6 covers natural gas markets while Chapter 7 discussed electricity. Chapter 8 describes the relatively new market for plastic, while Chapter 9 details one of the oldest markets, that of coal. Chapter 10 looks at another new market, the trading of carbon emissions. Chapter 11 covers agricultural products where the focus is on the relationship between some of the “soft” commodities and ethanol. The book concludes by considering the use of commodities within an investment portfolio.