Managing Commodity Risk Using Commodity Futures and Options

by Stephens, John J.

• ISBN13: 9780471866251
• ISBN10: 0471866253
• Edition: 1st
• Format: Hardcover
• Copyright: 2000-12-19
• Publisher: WILEY

Summary

Managing Commodity Risk is a clear and practical guide to managing commodity risk and explains how the commodity futures markets can be used to the manager's advantage. Beginning with a general overview of the definitions, processes and procedures, the book then explains in detail each of the individual approaches and looks at topics such as the commodity markets and their instruments, hedging with commodity futures and options and commodity futures exchanges. There is a checklist with key issues and approaches raised at the end of each chapter. This book is a practical primer for business managers who wish to manage and minimise the risk within their own industry.

Author Biography

JOHN J STEPHENS has considerable practical experience of commodities trading and runs a training company specialising in the futures and futures options markets. For 10 years he was CEO of a management consultancy firm with many large international clients, whilst from 1992 onwards he worked in the financial services sector for first SANLAM and later ABSA Bank, specialising in market and financial product development. He is also an advocate of the Supreme Court of South Africa.

Table of Contents

List of Tables	ix
Commodity Risk, Commodity Futures and the Management Function	1	(20)
Introduction	1	(1)
The Purpose of the Book	2	(1)
The Methodology	3	(1)
The Commodity Markets	3	(1)
Commodity Futures	4	(3)
Options on Futures	7	(1)
Identifying Commodity Risks and their Impact	8	(3)
Managing the Risks	11	(6)
Conclusion	17	(1)
Checklist for the Review of Chapter 1	18	(3)
The Commodity Markets and Their Instruments	21	(30)
Introduction	21	(1)
Categorising the Market Place	21	(4)
Price Discovery in the Marketplace	25	(1)
Market Participants	26	(1)
Market Positions	27	(3)
Cash Forward Contracting	30	(1)
The Commodity Futures Contract	31	(3)
Offsetting Futures Positions	34	(1)
Options on Commodity Futures	35	(1)
An Exchange Traded Agreement	36	(1)
Types of Options	37	(1)
Option Terminology	38	(1)
Classification of Options	39	(1)
Options and the Money	40	(2)
The Exercise Styles of Options	42	(1)
Exercising Commodity Options	42	(2)
Option Values	44	(2)
Pricing Options	46	(1)
Checklist for the Review of Chapter 2	47	(4)
Commodity Futures Exchanges	51	(30)
Introduction	51	(1)
Types of Exchanges	52	(2)
Successful Commodity Futures Exchanges	54	(1)
The Clearing House	55	(2)
Some Advantages Offered by Futures Exchanges	57	(1)
The Margin Requirement	58	(1)
The Margin Mechanism	59	(4)
Credit Risk in Futures	63	(1)
Orders and Order Strategies in the Futures Markets	63	(15)
Checklist for the Review of Chapter 3	78	(3)
Mechanics of the Marketplace	81	(38)
Understanding the Marketplace	81	(1)
Carrying Cost	82	(1)
Price Interaction	83	(7)
Price Relationships	90	(9)
Interpreting Market Information	99	(16)
Checklist for the Review of Chapter 4	115	(4)
Hedging with Commodity Futures and Options - The User's Hedge	119	(42)
Introduction	119	(1)
Commodity Risk	119	(4)
The Buying Hedge Using Futures	123	(4)
The Long Futures Hedge in an Inverse Market	127	(1)
Moves in the Basis Result in an Imperfect Hedge	127	(2)
The Long Futures Hedge in a Normal Market	129	(6)
The Buying Hedge Using Options	135	(3)
The Buying Hedge Using Long Options in an Inverse Market	138	(3)
The Buying Hedge Using Long Options in a Normal Market	141	(3)
The Buying Hedge Using Synthetic Long Futures in an Inverted market	144	(4)
The Long Hedge Using Synthetic Long Futures in a Normal market	148	(3)
The Buying Hedge Using Synthetic Long Call Options	151	(1)
The Buying Hedge Using Synthetic Long Calls in an Inverse Market	152	(3)
The Buying Hedge Using Synthetic Long Calls in a Normal Market	155	(3)
Checklist for the Review of Chapter 5	158	(3)
Hedging with Commodity Futures and Options - The Producer's Hedge	161	(36)
The Selling Hedge Using Futures Contracts	161	(3)
The Short Futures Hedge in an Inverse Market	164	(6)
The Short Futures Hedge in a Normal Market	170	(2)
The Selling Hedge Using Long Put Options	172	(3)
The Selling Hedge Long Put Options in an Inverse Market	175	(2)
The Selling Hedge Using Long Put Options in a Normal Market	177	(4)
The Selling Hedge Using Synthetic Short Futures in an Inverted market	181	(4)
The Short Hedge Using Synthetic Short Futures in a Normal market	185	(3)
The Selling Hedge Using Synthetic Long Put Options	188	(1)
The Selling Hedge Using Synthetic Long Puts in an Inverse Market	189	(2)
The Selling Hedge Using Synthetic Long Puts in a Normal Market	191	(3)
Comparative Table on the Differences Between a Long and a Short Hedge	194	(1)
Checklist for the Review of Chapter 6	195	(2)
Creative Commodity Risk Management	197	(22)
Commodity Risks in Business	198	(1)
Analysing the Risk	199	(4)
Selecting the Right Hedging Instrument	203	(4)
Selecting the Right Hedge Month	207	(1)
Following the Best Strategy	208	(5)
The Challenge to Management	213	(3)
Checklist for the Review of Chapter 7	216	(3)
Index	219