# Tag Info

5

The common approach to temperature derivatives in their first run of popularity (in the late 1990's) was to use an Ornstein-Uhlenbeck process to describe deviations of temperature from a seasonal average. So far as I know, no major innovations have arisen since then. Calibrating such a model is very simple, and so is valuing certain quantities such as ...

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My answer is to go with option 2, but go long the long-dated contracts. Looking at the forward curve for WTI crude, one can buy crude, say, for 5 years out at $83 per barrel. Not only you can avoid the monthly rolls, you can take advantage of the current medium-term/long-term backwardation in crude. 5 If I may share some wisdom that was passed to me and that I insisted I test empirically and through painful lessons learned to take seriously and trust in: There is nothing that is guaranteed in life (aside us all having to die). You already sound like you made up your mind on the long side of the oil trade. Have you considered that not the demand for oil ... 4 Just came across this thread...not sure if you already have your answer, but thought I'd give you a shout. In the energy business, we employ a range of models. You'll find the most sophisticated models on the Pricing desks, Risk Management desks and the Options trading desks. A variety of products are traded - futures, forwards and swaps. For options - in ... 4 I am a professor too and I did work with Siemens Corporate Technology which provides the quantitative technology for their copper and electricity trading (Siemens being one of the biggest players in this area in Europe). They are mainly using sophisticated neural networks. We also published a paper together, see my answer here: What types of neural networks ... 4 What about a total return swap on the price of oil? In general, search for things with a high correlation or cointegrated with oil and check what risks you would take on compared to physically holding oil and see how you can minimize them. For instance, in the oil stocks case, you could short equity futures to only take energy stock risk instead of general ... 4 Though not exactly spelling out models for natural gas. For natural gas trading I like the book as it explains a lot about how the industry works, and might help you develop models: Trading Natural Gas: Cash, Futures, Options and Swaps Hardcover – January 1, 1997 by Fletcher J. Sturm 4 As a starting point to this, determining seasonality for a given market is as follows: i) Take several years of historical spot price time series, e.g. TTF spot prices. For year$i$work out a yearly price$p_{yr,i}$by taking the arithmetic average of daily spot prices. Do the same in respect of month number$j$of the same year to get a monthly price$p_{...

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Definitions For fixed $T$ and moving $t \leq T$ then by definition $\color{blue}{(*)}$, forward prices $F(t,T)$ and future prices $\text{Fut}(t,T)$ are both conditional expectations. However, these expectations are not taken under the same probability measure. More specifically:  F(t,T) = \Bbb{E}^{\Bbb{Q}^T}\left[ \left. S_T \right\vert \mathcal{F}_t \...

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In an Asian-style swap, instead of using the last price quote of the underlying (such as commodity price), they take an average, such as the average closing price over the last month. This is fairly common in commodity swaps. As for pricing, a good start is this paper on pricing Asian-style interest rate swaps (where the floating leg uses the average of an ...

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cash settled ..XAU/USD is nothing but the spot price of gold quoted in dollars. The main difference between physical forwards and xau would be the end users. Think of big jewelry chains that need to lock in the price to keep their input costs low while the latter would be used by speculators (at the very least). Hence no different from a SnP futures. But the ...

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The controversy surrounding commodity futures flows from Gorton and Rouwenthorst (2004). The authors show an equal-weight portfolio of long positions in commodity futures provides a Sharpe ratio greater than the one earned by holding a cap-weighted portfolio of U.S. stocks (beginning in the 1950's through 2004 or so). In essence, why should holding a ...

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@Noob2’s comment above is “spot” on. Across the natural resource and energy value chains there are significant price risks that: A. Market prices will fall below price takers’ unit costs; and, B. Market prices will exceed price setters’ unit prices. In either case, if you assume that log price changes are a martingale, and that expected profit is the ...

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Just my 2cts' worth: With commodity swaps exchanging typically a daily spot price (i,e, immediate delivery price) vs a fixed rate payable in regular intervals, the only difference to a truly Asian product is that discount factors are not perfectly equal to unity. So while rates are not high or tenors very long, regular commodity swaps would be pretty close ...

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Your “coffee price” is spot. Your “coffee index” (or ETF) is excess/total returns, i.e. it includes index rolls. That is the impact of the contango or backwardation of coffee futures as they roll from one contract to the next. See: https://www.bloomberg.com/quote/BCOMSP:IND https://www.bloomberg.com/quote/BCOM:IND Commodity prices are down 10% in 5 ...

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I don't have a huge amount of market experience, but I have traded heat rate options at a merchant generation company and at an investment bank. First off, I disagree Sid Jacobson's answer. Or at least I have never seen a contract with those settlement terms trade. Those terms are, for a heat rate call, eg, final settlement: C = P/G - K, which = P/G - HR, ...

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A Heat Rate Option is a standard contract traded bi-laterally or on an exchange where the ratio between Electricity at an agreed location and Natural Gas at an agreed location is the strike price for an agreed quantity at an agreed expiration date. This allows holder the ability to manage the the cost of the Market Implied Heat Rate. For example if May ...

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The exchange hopes that people will reference their new markers as the referenced price index in OTC derivative contracts or in physical supply contracts - the idea being that the marker provides an independent and fair assessment of the market at a point in the day relevant to the local market (2:30pm NYC time when ICE Brent settles is the middle of the ...

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Since all futures are linear instruments you can achieve a perfect hedge by going short or long into the same future depending on your position. If however there are no available futures you can use cross-hedging as explained by Hull (2007) i get an error bellow I'm not sure why so I'll put it in code format: > To answer your question the delta of a ...

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At first sight, I'd say it's ok. You'll have to let the constructor of your process class take the maturity time, so you can create different instances with different $T$.

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One way is to check their (linear) dependency with Pearson's correlation coefficient. If you rather want to check for sign dependency, you can use Spearman's correlation coefficient. You could for example take the yearly data, calculate the correlation coefficient between the two data sets for every year and then check, whether the coefficient changed ...

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Please see the papers below: Sebastián A. Rey, Non-Arbitrage Valuation of Equities. International Journal of Financial Markets and Derivatives (2015) vol. 4, no 3/4, p. 231-245 http://www.inderscienceonline.com/doi/abs/10.1504/IJFMD.2015.073472?mobileUi=0& Sebastián A. Rey, The Valuation of Equities and the GDP Growth Effect: A Global Empirical Study. ...

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Your question piqued my interest. While not specific to commodities, this looks like a good starting point for quantifying political risk: Practically, this means taking the following steps (according to Rigobon 2003): Step 1: Define the treatment group, or a set of “event” days on which the variance of the unobservable factor is high, such as the ...

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So, the interpretation here is fairly straightforward but I don't think it is likely what you are looking for. Looking at the factors above I notice the returns for each future matter, but the month contract doesn't matter as much. You can see that in the first factor whereas the second factor you start to see some of the variation across different ...

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You misunderstand the role of the exchange. The exchange does not guarantee anything. It only (1) Decided that spreads can be traded between willing counterparties (the exchange disseminates bid and ask and other information for spreads through its regular systems) and (2) The exchange provides a convention to ease the reporting of spread trades, the spread ...

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There is no interest rate associated with spot PMs. The reason why FX is evaluated in this way is because you can invest in short-term sovereigns (risk free rate) and get cash flow. So the FX rates are partially determined by the differentials between rates. PMs are quite different. If anything spot PMs are a negative yielding asset because of storage costs. ...

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Not that I know, and I'm in that business. Allegro is a ETRM provider, equivalent to Murex in the banking area, but, as far as I know, they don't provide any library outside their main system (which is not able to deal with any kind of exotic), and definitely nothing open source. Let me know if you find anything, because I would be glad to use it. Depending ...

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This is a typical issue in physical commodities trading and I don't think you'll find free sources for such prices because it's precisely some firm's business to talk to market participant and perform surveys in order to come up with an approximate. As suggested by noob2, what I've seen in the industry is usually a regression, but you need at least ...

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No need to convert futures prices to spot prices. Your simulation should look like: $S_{T}=S_{0}*exp(\mu T-0.5\sigma^{2}T+\sigma \sqrt{T}z)$ where $\mu$ is the drift of spot prices. If you use the spot-forward relationship $F=S_{0}*exp(\mu T)$, you can rewrite the equation in your simulation to be: $S_{T}=F*exp(-0.5\sigma^{2}T+\sigma \sqrt{T}z)$ Put ...

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The answer given by MJ73550 already covers most if the points in my opinion. I would put it like this: Concerning the drift: if the cost-of-carry relationship is used in your model then this is the correct drift to use for the spot price to derive the price any derivatives (forwards, futures, options) - this is the risk neutral drift. This has nothing to ...

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