By Craig Pirrong
Commodities became an immense element of many traders' portfolios and the point of interest of a lot political controversy over the last decade. This publication makes use of structural versions to supply a greater figuring out of the way commodities' costs behave and what drives them. It exploits modifications throughout commodities and examines quite a few predictions of the types to spot the place they paintings and the place they fail. The findings of the research are important to students, investors, and coverage makers who are looking to larger comprehend usually difficult - and severe - events within the costs of commodities from aluminum to grease to soybeans to zinc. [C:\Users\Microsoft\Documents\Calibre Library]
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Additional resources for Commodity Price Dynamics: A Structural Approach
Functions, respectively, describe how prices and carry-in depend on the three state variables. ˆ y, and z are real numbers, it is not practical to solve for these Because x, functions exactly for every possible value of these variables as suggested in the road map in the prior section. Instead, these functions are approximated on a grid. That is, the analyst discretizes the problem and evaluates the ˆ functions for Ny values of y, Nz values of z, and Nx values of x. A conventional approach is to create evenly spaced grids in all three variables.
This is inconsistent with a competitive equilibrium in the forward and spot markets for the commodity. This strategy is available to everyone, meaning that all agents would try to purchase the commodity on the spot market at P and sell on the forward market at F . This would drive up the spot price and drive down the forward price until the arbitrage opportunity disappears. Thus, in equilibrium: e −r dt F ≤ P Now consider the opposite situation, with: e −r dt F < P This may or may not represent an arbitrage opportunity.
If the equilibrium price at t is P , the equilibrium consumption q tD solves: P = D(q tD , Zt ) and the equilibrium consumption q tS solves: P = S(q tS , Yt ) Moreover (with a slight abuse of notation), recall that carry-out xt , carry-in xt−dt , and production and consumption are related: xt = lim [xt− t→0 t + q tS − q tD ] Equilibrium spot and forward prices must solve all of these equations simultaneously. 1). 3 The Next Step: Determining the Forward Price Before proceeding further, it is worthwhile to step back and remember what we are really interested in knowing.