Derivatives, Risk and Markets (IND640)

Content

NB! This is an elective course and may be cancelled if fewer than 10 students are enrolled by August 20th for the autumn semester.

This course covers a combination of fundamental analysis of commodity markets in addition to looking into measures of risk and instruments to handle those risks through hedging.

Content:

• Fundamental demand and supply analysis of commodity markets
• Equilibrium displacement model
• Applied price analysis
• The role of storage in commodity markets
• Futures markets
• Optimal price risk hedging

The course consist of three parts; markets, risk and derivatives

The first part of the course covers the different parts of a market equilibrium. It will be shown how different factors influence supply and demand. This provides the tools to investigate the price determination process for commodities and assets as well as how market characteristics influence price volatility.

The second part will cover portfolio theory and risk management. Portfolio theory explains the relationship between risk and return and this course will provide a set of tools for portfolio analysis. In particular, Value-at-Risk (VaR) is explained. VaR is a method used in financial markets and for regulatory purposes to estimate the worst-case scenario for a portfolio, and is estimated using parametric, historical and Monte Carlo estimation methods.

The third part deals with commonly applied market based instruments to deal with price risk, such as futures contracts, swaps and options. This will include the role of speculation in commodity markets. We will also look at management of commodity stocks (storage), and its influence on price determination and price volatility, including the relationship between spot and futures markets.

Learning outcome

Knowledge:

• Understand how the utility maximization problem drives demand for goods and the profit maximization problem drive the derived demand for commodities
• Learn what sets commodity price behavior apart from other goods and services
• Be familiar with the equilibrium displacement model (EDM)
• Understand basic data analysis of commodity prices
• Understand how storage affects commodity price behavior and volatility
• Understand the risk and return tradeoff and how they affect portfolio theory
• Understand the most important Value-at-Risk (VaR) methods
• Futures and options markets for commodities
• Learn about market-based price risk hedging

Skills:

• The candidate is able to apply the logic of supply and demand models to specific commodity markets.
• The candidate is able to apply the equilibrium displacement model to commodity markets
• The candidate can estimate basic supply, demand, and price response functions
• The candidate can analyze the impact of commodity market news on commodity prices
• The candidate can analyze risk and return tradeoffs
• The candidate can apply and interpret risk in a portfolio using Value-at-Risk (VaR)
• The candidate can interpret commodity futures prices
• The candidate can carry our optimal price risk hedging using futures and options

General competence:

• The candidate is capable of applying the knowledge gained in the course to undertake a rudimentary fundamental analysis of commodity markets.
• The candidate is able to communicate and report the fundamental characteristics of a market.
• The candidate is able to interpret and undertake data analysis of commodity markets and their prices
• The candidate is able to report how storage relates to the commodity and futures market
• The candidate can interpret and communicate market-based price risk hedging

Required prerequisite knowledge

Recommended prerequisites

Exam

Coursework requirements

Course teacher(s)

Course coordinator:

Course teacher:

Course teacher:

Course teacher:

Head of Department:

Open for

Course assessment

Literature