Financial Modelling in Commodity Markets

This book reflects the needs of a reader who requires a synthetic guide to the definition and implementation of models for pricing commodity-linked products and their use. Therefore, on the one hand the author summarises the main steps of the financial-mathematical modelling, on the other hand she does not fail to highlight the main features of the models and to give useful insights for their implementation in Excel environment. The practical exercises are necessary to make the reader understand how it is possible to apply all the described theory in real-life situations. The first chapter deals with the most common and used financial products in commodity markets. In particular, it contains the explanation of their payoffs and the description of the main characteristics for operational scopes. The second and third chapters contain the most relevant models respectively for the spot and forward/futures prices. They are very concise in providing the main features of such models and giving some hints for their implementation through the Excel software. The main topic of Chapter 4 is the pricing of financial options. In particular, options, which have the spot price as underlying, are priced through the continuous time model of Black and Scholes and the discrete time Binomial model. If the underlying is the forward/futures price, we propose the Black model. Furthermore, the Monte Carlo approach to price other financial derivatives is introduced. Chapter 5 contains some complete applications of the theory explained in the previous chapters. The reader will be able to identify with a risk manager who needs to hedge the electricity price risk when he buys electricity from a producer and sells it to the final consumer; with a financial operator who needs to choose the best model to describe the evolution of the spark spread; and with a trader who develops strategies to trade a portfolio of crude oils. Finally, Chapter 6 recalls some basic statistical tools used in the book.