Commodity derivatives : markets and applications / Neil C. Schofield.

Includes index.

Place of publication from CIP data view.

ABOUT THE AUTHOR
Neil Schofield is the Principal of FMT Ltd, a UK-based firm offering training services in treasury, derivatives, capital markets, and risk management to financial institutions, central banks, and corporations worldwide. From 2001 to 2008 he was Global Head of Financial Markets Training at Barclays Investment Bank.

TABLE OF CONTENTS
Preface xi

Chapter 1 Fundamentals of Commodities and Derivatives 1

1.1 Market overview 2

1.2 Market participants 3

1.3 Traded versus non-traded commodities 6

1.4 Forward contracts 8

1.5 Futures 8

1.6 Swaps 10

1.7 Options 11

1.8 Exotic options 14

Chapter 2 Derivative Valuation 18

2.1 Asset characteristics 18

2.2 Commodity prices and the economic cycle 18

2.3 Principles of commodity valuation 19

2.4 Forward price curves 21

2.5 Commodity swap valuation 32

2.6 Principles of option valuation 39

2.7 Measures of option risk management 44

Chapter 3 Risk Management Principles 58

3.1 Defining risk 58

3.2 Commodity market participants – the time dimension 60

3.3 Hedging corporate risk exposures 61

3.4 A framework for analysing corporate risk 62

3.5 Hedging customer exposures 63

3.6 Trading risk management 66

Chapter 4 Gold 76

4.1 The market for gold 76

4.2 Gold price drivers 81

4.3 The gold leasing and deposit market 91

4.4 Hedging 96

4.5 Trading gold 106

4.6 Yield enhancement 111

4.7 Summary 112

Chapter 5 Base Metals 114

5.1 Overview of base metal production 114

5.2 The copper lifecycle 115

5.3 Aluminium 119

5.4 The Steel market 120

5.5 The London Metal Exchange 122

5.6 Base metal price drivers 130

5.7 Electric Vehicles 133

5.8 Structure of market prices 134

5.9 Hedges for aluminium consumers in the automotive sector 139

5.10 Summary 157

Chapter 6 Crude Oil 159

6.1 Overview of energy markets 159

6.2 The value of crude oil 159

6.3 An overview of the physical supply chain 163

6.4 Refining crude oil 165

6.5 The demand for and supply of crude oil 172

6.6 Price drivers 179

6.7 The price of crude oil 189

6.8 Trading crude oil and refined products 195

Notes 209

6.9 Managing price risk along the supply chain 212

Chapter 7 Natural Gas 237

7.1 Formation of natural gas 237

7.2 Measuring natural gas 238

7.3 The physical supply chain 238

7.4 Deregulation and re-regulation 242

7.5 The demand for and supply of natural gas 245

7.6 Natural gas prices 250

7.7 Natural gas price drivers 257

7.8 Trading natural gas 260

7.9 Natural gas derivatives 263

Chapter 8 Electricity 280

8.1 What is electricity? 280

8.2 The physical supply chain 283

8.3 Market structure and regulation 285

8.4 Price drivers of electricity 291

8.5 Trading electricity – an overview 301

8.6 Electricity derivatives 313

Chapter 9 Plastics 332

9.1 The chemistry of plastic 332

9.2 The production of plastic 333

9.3 Monomer production 334

9.4 Polymerisation 334

9.5 Applications of plastics 335

9.6 Summary of the plastics supply chain 336

9.7 Price determination 336

9.8 Plastic price drivers 337

9.9 Forwards and swaps 338

9.10 Option strategies 340

Chapter 10 Bulk Commodities 341

10.1 The basics of coal 341

10.2 The demand for and supply of coal 343

10.3 Coal – the physical supply chain 346

10.4 Coal derivatives 349

10.5 Iron ore 353

10.6 Freight markets – the fundamentals 355

Chapter 11 Climate and Weather 368

11.1 The science of climate change 368

11.2 The consequences of climate change 371

11.3 The argument against climate change 372

11.4 History of human action against climate change 373

11.5 Price drivers of emissions markets 376

11.6 EU Emission Trading System 379

11.7 Emission derivatives 384

11.8 Weather derivatives 388

Chapter 12 Agriculture 394

12.1 Agricultural markets 394

12.2 Definitions 394

12.3 Agricultural products 395

12.4 Soft commodities 403

12.5 Ethanol 409

12.6 Price drivers 412

12.7 Exchange traded agricultural and ethanol derivatives 421

12.8 Over-the-counter agricultural derivatives 426

Chapter 13 Commodity-Linked Financing 433

13.1 The financing need 433

13.2 Project finance 437

13.3 Working capital and the asset conversion cycle 440

13.4 Longer-term debt funding solutions 454

Chapter 14 Commodity Investing 463

14.1 Commodity investors 463

14.2 Preferred instruments 465

14.3 Market size 465

14.4 Rationale for investing in commodities 466

14.5 Commodity indices 469

14.6 Total Return Swaps 478

14.7 Exchange traded products (ETPs) 481

14.8 Structured products 487

Glossary 499

Bibliography 507

Biography 510

Index 511

"Commodities and commodity derivatives are one of the foundations stones of today's financial markets. The derivatives market is estimated to be worth more than $1.2 quadrillion, with the trade in derivatives dwarfing the trade in the actual underlying physical commodities. Using structures unique to the individual market, each chapter includes an explanation of the commodity and an analysis of its physical market, discussion on the typical patterns of demand and supply and the main factors that will influence the price of the commodity and the main products. Each chapter focuses on how the products could be used along the physical supply chain and seeks to identify the main market risks and how they can be hedged. This expanded edition includes coverage of: theories of price formation, OIS valuation, spread options, options smiles and skews, gold, steel and iron-ore, project finance, crude logistics, refined crude products, US electricity market, dry freight, climate change, price drivers of emissions trading, EU ETS, agricultural markets, ethanol, ETFs, index structures and more"-- Provided by publisher.

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