Skip to main content

Risk Management in Commodity Markets: From Shipping to Agriculturals and Energy

Risk Management in Commodity Markets: From Shipping to Agriculturals and Energy

Helyette Geman (Editor)

ISBN: 978-1-118-46738-1

May 2012

320 pages


Commodities represent today the fastest growing markets worldwide. Historically misunderstood, generally under- studied and under- valued, certainly under- represented in the literature, commodities are suddenly receiving the attention they deserve.

Bringing together some of the best authors in the field, this book focuses on the risk management issues associated with both soft and hard commodities: energy, weather, agriculturals, metals and shipping.  Taking the reader through every part of the commodities markets, the authors discuss the intricacies of modelling spot and forward prices, as well as the design of new Futures markets. The book also looks at the use of options and other derivative contract forms for hedging purposes, as well as supply management in commodity markets.  It looks at the implications for climate policy and climate research and analyzes the various freight derivatives markets and products used to manage shipping and freight risk in a global commodity world.

It is required reading for energy and mining companies, utilities’ practitioners, commodity and cash derivatives traders in investment banks, CTA’s and hedge funds


About the Editor.

About the Contributors.

1. Structural Models of Commodity Prices (Craig Pirrong).

1.1 Introduction.

1.2 A Commodity Taxonomy.

1.3 Fundamental Models for Storable Commodities.

1.4 Non-Storable Commodities.

1.5 Summary.

1.6 References.

2. Forward Curve Modelling in Commodity Markets (Svetlana Borovkova, Universiteit Amsterdam, and Helyette Geman).

2.1 Introduction.

2.2 Forward Curve Models for Non-Seasonal Commodities.

2.3 The Seasonal Forward Curve Model and its Extensions.

2.4 Principal Component Analysis of a Forward Curve.

2.5 Forward Curve Indicators.

2.6 Conclusions.

2.7 References.

3. Integrating Physical and Financial Risk Management in Supply Management (Paul R. Kleindorfer).

3.1 Introduction.

3.2 A Primer On Previous Supply Management Contracting Literature.

3.3 A Moddeling Framework and a Simple Illustrative Case.

3.4 Recent Contributions to the Optimal Contracting Literature.

3.5 Some Open Research Questions and Implications for Practice.

3.6 References.

4. The Design of New Derivative Markets (Giovanni Barone-Adesi).

4.1 Introduction.

4.2 Determinants of Success of New Derivative Markets.

4.3 Price Discovery.

4.4 Trading, Clearing and Margining.

4.5 Market Integrity.

4.6 Market Recovery.

4.7 Market Oversight.

4.8 Case Studies.

4.9 Conclusion.

4.10 References.

5 Risk Premia of Electricity Futures: A Dynamic Equilibrium Model (Wolfgang Bühler, University of Mannheim, and Jens Müller-Merbach).

5.1 Introduction.

5.2 The Dynamic Equilibrium Model.

5.3 Comparative Statics.

5.4 Empirical Study.

5.5 Conclusion.

5.6 References.

6. Measuring Correlation Risk for Energy Derivatives (Roza Galeeva, Jiri Hoogland and Alexander Eydeland).

6.1 Introduction.

6.2 Correlation.

6.3 Perturbing the Correlation Matrix.

6.4 Correlation VaR.

6.5 Some Examples.

6.6 Discussion and Conclusions.

6.7 References.

7. Precaution and a Dismal Theorem: Implications for Climate Policy and Climate Research (Gary W. Yohe, Wesleyan University and Richard S. J. Tol).

7.1 Introduction.

7.2 A New Source of Concern: Weitzman’s Dismal Theorem.

7.3 Implications of the "Dismal Theorem".

7.4 Some Concluding Remarks.

7.5 References.

8. Incentives for Investing in Renewables (Falbo Paolo, Felletti Daniele and Stefani Silvana).

8.1 Introduction and Background.

8.2 Subsidies for Energy.

8.3 The Model.

8.4 Statistical Estimations.

8.5 Risk Analysis.

8.6 Conclusions.

8.7 References.

9. Hedging the Risk of an Energy Futures Portfolio (Carol Alexander).

9.1 Mapping Portfolios to Constant Maturity Futures.

9.2 The Portfolio and its Key Risk Factors.

9.3 Identifying the Key Risk Factors.

9.4 Hedging the Portfolio Risk.

9.5 Conclusions.

9.6 References.

10. Spark Spread Options when Commodity Prices are Represented as Time Changed Processes (Elisa Luciano).

10.1 Spark Spread Options.

10.2 Time Change in a Nutshell.

10.3 Time Change and Commodity Prices.

10.4 An Application to PJM Electricity and NYMEX Natural Gas.

10.5 Conclusions and Further Research.

10.6 Appendix A: Modelling Specification in the Multivariate Case.

10.7 Appendix B: Alternative Modelling Specifications in the Univariate Case.

10.8 References.

11. Freight Derivatives and Risk Management: A Review (Manolis G. Kavussanos and Ilias D. Visvikis).

11.1 Introduction.

11.2 Forward Freight Agreements.

11.3 Freight Futures.

11.4 "Hybrid" (Cleared) FFAs.

11.5 Freight Options.

11.6 Empirical Research on Freight Derivatives.

11.7 Conclusion.

11.8 References.

12. Mean-Reversion and Structural Breaks in Crude Oil, Copper, and Shipping (H. Geman and S. Ohana).

12.1 Introduction.

12.2 Fundamentals of Copper, Crude Oil, and Shipping.

12.3 Defining Mean-Reversion.

12.4 Dataset and Unit Root Tests.

12.5 Conclusion.

12.6 References.

13. Managing Agricultural Price Risk in Developing Countries (Julie Dana and Christopher L. Gilbert).

13.1 The Liberalization Context.

13.2 Incidence of Risk Exposure.

13.3 Instruments and Problems.

13.4 Price Risk Management in the Developing Country Supply Chain.

13.5 Concluding Comments.

13.6 References.

14. Gaining Exposure to Emerging Markets in Institutional Portfolios: The Role of Commodities (George A. Martin and Richard Spurgin).

14.1 Introduction.

14.2 Asset Markets and Economic Growth.

14.3 Are Emerging Markets Equity Markets and Commodity Markets Integrated?

14.4 Implications for the Investment Policy of Institutional Investors.

14.5 Conclusion.

14.6 References.

15. Case Studies and Risk Management in Commodity Derivatives Trading (Hilary Till).

15.1 Introduction.

15.2 Institutional Risk Management.

15.3 Proprietary-Trading Risk Management.

15.4 Hedge Fund Risk Management.

15.5 Fund-of-Hedge-Funds Diversification.

15.6 Market Risk Management.

15.7 Conclusion.

15.8 References.