McDonald, Chapter 6 contains 34 pages covering the following leraning objectives:
* Apply commodity concepts such as storage costs, carry markets, lease rate, and convenience yield.
* Explain the basic equilibrium formula for pricing commodity forwards.
* Describe an arbitrage transaction in commodity forwards, and compute the potential arbitrage profit.
* Define the lease rate and explain how it determines the no-arbitrage values for commodity forwards and futures.
* Define carry markets and illustrate the impact of storage costs and convenience yields on commodity forward prices and no-arbitrage bounds.
* Compute the forward price of a commodity with storage costs.
* Calculate a continuous lease rate for a commodity asset. Explain the relationship between the lease rate, the convenience yield, and the storage cost.
* Identify factors that impact gold, corn, electricity, natural gas, and oil forward prices.
* Compute a commodity spread. Explain how basis risk can occur when hedging commodity price exposure.
* Evaluate the differences between a strip hedge and a stack hedge and explain how these differences impact risk management.
* Describe examples of cross-hedging, specifically the process of hedging jet fuel with crude oil and using weather derivatives.
* Explain how to create a synthetic commodity position and use it to explain the relationship between the forward price and the expected future spot price.
After reviewing the notes you will be able to apply what you learned with practice questions. We have also included the End of Chapter Q&A for your review.Features & Pricing