Piloto de Plan de Manejo de Residuos Sólidos

To cover all the different needs of the market participants, a range of different financial products enabling both, hedging and speculation, were developed. Un-fortunately, some investors might feel lost in the forest of opportunities. Therefore, they should first develop a set of requirements that meet their individual investment needs. Then, they should search and screen and just finally select what will meet their individual objectives. In the following section the most common commodity investment vehicles and related products are introduced. For it, Figure 2.16 shall give a first overview. There are two major ways of investing into commodities: the direct and the indirect over stocks.

Our main focus lies on the direct way to get commodity exposure. To be very precise, it is divided into the direct commodity investment over financial products and the direct commodity investment into the commodity product. But we assume that no investor is actually interested in camping oil barrels or corn bags in his basement, we will focus on the direct commodity investment over financial prod-ucts without physical delivery. The basic prodprod-ucts are described in Section 2.3.1

39We will examine the theory of normal backwardation in Section 3.1.

40See e.g. [Edwards Liew 1999] or [Fung Hiesh 1997].

Figure 2.16: Overview of Commodity Investment Instruments

and called derivatives including futures, the elementary vehicle to trade raw com-modities, swaps, options linked bonds and certificates. Following, the investment in commodity portfolios, both actively and passively managed ones, are highlighted.

To get actively managed commodity exposure, an investor has to hire a so-called Commodity Trading Advisor (CTA). The different ways to do so are described in Section 2.3.2. Passively managed ones are represented by indices. Exposure can be taken through index linked products such as index tracking investment or exchange traded funds. Because the main part of this work will later focus on this investment vehicle we will dedicate it the whole Section 4. Finally, in Section 2.3.3 we will bring in mind stocks of commodity producing companies, i.e. the indirect commodity in-vestment way. For many investors this represents the traditional and familiar way of taking exposure in commodities markets. Buying stocks or stock funds are an uncomplicated long term orientated investment methodology that is not connected with maturities. But our focus lies on direct commodity investment and therefore, we will keep this topic short.

2.3.1 Commodity Derivatives

As we have already pointed out, that there are different factors which increased the demand for commodity related products. The following section describes the differ-ent types of derivatives, i.e. financial products which payoff structure depends on the price process of another financial instrument that is commonly used to get and/or hedge commodity exposure. The main structure in exchange traded commodity

markets are futures contracts. They are the original vehicle to trade commodi-ties. Although the price of a futures contract depends on the current spot (cash) price⁴¹of the underlying commodity, it represents on its side the underlying of other derivatives like options, swaps and commodity linked bonds.

Many economists, including Alan Greenspan, stated that the financial derivatives markets have significantly decreased the cost of doing business and thus have risen the standard of living for everybody. A major step to this development was done in the work of Merton Miller, Harry Markowitz and William Sharpe who won the 1990s Novel Price in economics for recognizing and illustrating the value of derivatives in business application.⁴² Their theoretical conclusions found their way into practical applications created by Fischer Black, Myron Scholes, Robert Shiller, Rudi Zagst and many others.

Today many financial intermediaries, including domestic and international banks, public and private pension funds, investment companies, mutual funds, hedge funds, energy providers, asset and liability managers, mortgage companies, swap dealers, and insurance companies, that face foreign exchange, energy, agricultural or envi-ronmental exposure use financial markets to hedge or manage their price risk. For instance, at the Chicago Mercantile Exchange (CME) more than one billion con-tracts representing an underlying notional value of 640 trillion US dollar were traded and cleared in 2005.⁴³

2.3.1.1 Forwards and Futures

A forward contract is a bilateral agreement where one party is going to buy an asset at a today predefined time in the future for a fixed price. Hereby someone can be long or short the contract depending on the fact whether he took the asset buyer or seller position. Forwards were originally developed to hedge commodity price risk and are useful vehicles to look at future prices. As described in Section 2.2 commodity producers need to ensure future cash flows to be cost covering. First applications of forwards go back in the 18th and 19th centuries. Potato growers in the state of Maine (USA) started selling their crops at the time of planting in order to finance the production process. Such arrangements became particularly important

41For the feature of spot prices in commodity markets see the discussion in Section 5.1.1.

42William Sharpe was rewarded for the Capital Asset Pricing Model, beta and relative risks, Harry Markowitz for his theory of efficient portfolio selection and Merton Miller for his work on the effect of a firm’s capital structure and dividend policy on market price.

43Data source: Futures Industry Magazine Mar/Apr 2006, numbers include financial derivatives (i.e. derivatives on interest rates or equities)

in industries where non influenceable external factors like weather conditions are of high importance and the production process is cost intensive.

The first established emporiums where in terms of quantity, quality and delivery date standardized forward contracts, so-called future contracts, were traded, are the New York Cotton Exchange (NYCE), founded 1842, and the Chicago Board of Trade (CBOT), founded 1848.

Although forwards and futures on the same underlying with the same time to expiry have the same original spirit ”sell an asset today but deliver it tomorrow” they are different in many counts, including transaction costs, credit risk,⁴⁴ customization and stochastic interest rate. The most noticeable difference between futures and forwards is that futures are marked-to-market daily and their participants have to adjust their positions on the so-called margin account which introduces an addi-tional re-investment risk: while the profit or loss of a forward contract occurs at the maturity date, the profits and losses of futures contracts are spread over the live of the contract and occur on a daily basis. For instance, if a participant has a long position in a futures contract which price went down from one day to the next, then he gets the so-called margin call from the clearing house standing behind the respec-tive exchange what requests him to cash settle the difference on the so-called margin account. From this point of view a future is a series of daily settled forwards and its value over the whole period is the net present value (NPV) of the single margin calls. If interest rates are not stochastic the NPV equals the NPV of a forward over the whole period.⁴⁵ If interest rates are stochastic the futures price is greater or less than the forward price depending on the correlation of interest rates and the com-modity spot price. If they are positively correlated (what in theory should be the case because commodities are real assets) daily payments from price increases will on average be more heavily discounted than payments from price decreases, so the initial futures price must exceed the forward price.⁴⁶ However, studies have shown, that the difference is typically small. [Pindyck 1994] compared one-month heat-ing oil contracts and estimated the difference beheat-ing less than 0.01%. [French 1983]

compared the futures prices of three month silver and copper contracts with their equivalent forward prices and found that the difference is about 0.1%. Therefore, it is common not to differentiate between forward and futures prices. We will do so, too.

44Because forward contracts are over the counter (OTC) bilateral agreements they embody coun-terparty default risks.

45For the formal mathematical proof that forward and futures prices are equal under the assump-tion of deterministic interest rates see [Zagst 2002].

46For further information see [Cox Ross Ingersoll 1981]

Historically, the expiration months of futures contracts were without some excep-tions March, June, September and December reflecting the seasonality in commodi-ties markets. This has changed with growing markets. Today there are contracts for every delivery month and long term maturities until 5 years available.

As we mentioned introductory, futures trading has grown rapidly. For instance, the New York Mercantile Exchange (NYMEX) Crude Oil Future is meanwhile listed under the 20th most often traded future contracts worldwide with a trading volume of over 50 million contracts in 2005. This was an increase of around 15%. Its main competitor Brent crude oil futures contract, follows with clear distance. Although its trading volume went up 17% in 2005 it only could reach a volume of 25 million traded contracts. Over this electronic trading is coming up what will additionally boost trading volume in the next years.⁴⁷

The metals markets showed the same picture. The trading of gold at the NYMEX went up over 6% in 2005 to approximately 13 million traded contracts. The London Metal Exchange (LME) surpassed Shanghai with the most copper futures traded worldwide, with volume up approximately 4% to over 16 million.

The agricultural trading has grown as well. Surprisingly, putting future and option contracts in volume together it has the highest trading volume of all commodity groups. Although the Asian trading volume went down in 2005 the US exchanges registered strong increases: the Chicago Board of Trade (CBOT) corn future went up 14% to over 23 million traded contracts, the CBOT wheat future went up 25% to over 8 million traded contracts and the New York Board of Trade sugar #1 future went up 20% to over 12 million traded contracts.

2.3.1.2 Options

Commodity options are options where the underlying asset is a commodity or com-modity index. In contrast to futures contracts they certify the right but not the duty to buy or sell an asset at some future point.

Commodity options are identical to options on traditional assets such as stocks and are primary used to manage risk or to generate premium income through asymmetric risk exposure. Nowadays, stock options are more common than commodity options.

Nevertheless the options concept was originally developed in commodity markets.

First historical traditions go back to the mathematician, philosopher and astronomer

47Data source: Futures Industry Magazine Jan/Feb 2006

Tales. In expectation of a good olive harvest he bought the right to use olive squeezing machines. In the 17th century options were introduced in the Netherlands to trade tulips, but the first standardized options exchange, the Chicago Board Option Exchange, was founded not until 1973. Together with the in the same year published fundamental Black/Scholes option pricing model this was the starting shoot for professional financial option trading.

The available standard forms are call and put options. The former are buy options:

the holder of the option has the right to buy the underlying at a predefined price and time in future. A put option is a sell option: the holder of the option has the right to sell the underlying at a predefined price and time in future. In addition to the standard forms there are cap and floor options over the counter (OTC) available. A cap is a series of call options and a floor is a series of put options on the commodity itself. They are commonly used to manage ongoing price exposure to the underlying commodity. Exchange traded options are exercised into a position of the underlying commodity future contract which is either cash or physically settled. OTC options are mainly cash settled directly.

Option trading has grown as futures trading did. The LME copper future regis-tered a trading volume increase of approximately 13% to nearby 2 million contracts in 2005. Only precious metals options trading is an exception. The New York Mercantile Exchange reported a decrease of gold option trading of over 40%.

However, heavy trading is reported about the NYMEX crude oil option. Its trading volume went up over 30% to over 12 million contracts. Together with the NYMEX crude oil futures trading volume this counts for approximately one quarter of global energy futures and options trading.⁴⁸

Putting commodity futures and options trading together it counts for a trading volume of over 620 million contracts in 2005. Comparing this number with other market’s trading volumes expansion potential can be suspected: the equity indices futures and options trading volume counts for over 3.4 billion contracts and the derivatives trading of individual equities for another 2 billion, followed by the interest rate market with over 2.1 billion traded futures and options contracts in 2005.

48Data source: Futures Industry Magazine Jan/Feb 2006

2.3.1.3 Swaps

Commodity swaps are generally the same like interest rate swaps⁴⁹ with the dif-ference that the underlying payment streams are linked to the price movement of a commodity. A swap is an agreement between two parties to regularly exchange payments. The most common type is the fixed-for-floating commodity swap. The buyer of the swap pays at predefined usually equally spaced dates t₁, . . . , t_n a fixed price for a commodity times the notional and receives from the seller of the swap the market value of the commodity times the notional. Hereby the notional is given in commodity units, e.g. tones of grain or barrels of oil. Figure 2.17 illustrates the exchange of payments at the oil market.

Figure 2.17: Commodity Swap Payment Streams

In order to hedge his cost structure a crude oil consumer such as an heating oil refiner enters into the described swap as the fixed leg, e.g. he is going to pay a fixed price for crude oil times the notional at predefined dates. Generally, he will expect oil prices to rise. On the other hand of the swap stands the producer of oil, e.g. the oil extraction company. It can be expected that its financial management forecasts a price decrease and wants to sell its product to a price fixed on the current high level.

In vocabularies of cash settlement e.g. he is going to pay the floating (respective market) price times the notional. Usually, just the net positions are cash settled.

Generally, as described under Section 2.2, producer and consumer do not act directly with each other but traders manage to bring the adequate parties together. We have seen that the side of the swap entered by a party depends on its expectation of ongoing price developments. Because many commodity swaps are cash settled today, investors can speculate on their expectation through entering into the respective side of a swap instead of entering into a series of the respective futures contracts. Out of the investors point of view an advantage of swaps is the long term orientation and the absence of rolling maturing futures contracts.

Swaps can easily be used in structured products where the exchange of different

49For a general introduction to interest rate swaps see [Zagst 2002]

types of cash payments are enabled, i.e. someone could think about a price-for-interest swap. Insurance companies or other institutional investors that wish to carry a commodity exposure, without being allowed by its regulatory body, may do so by entering i.e. a price-for-interest swap with a party that is allowed to take direct commodity exposure, i.e. a bank.

2.3.1.4 Commodity Linked Structured Notes

Commodity linked structured notes are engineered to give investors commodity ex-posure through an interest rate security where a commodity derivative is embedded.

The issuer of the structured note has no commodity exposure itself. In fact, he is connected to a commodity desk or dealer which provides the relevant commodity return cash flows as shown in Figure 2.18.

Figure 2.18: Commodity Linked Structured Notes

Basically, there are three different types of commodity linked structured notes: Com-modity forward linked notes, comCom-modity option based notes and comCom-modity index based notes. These instruments generally are designed in two ways: either the final payment or the coupon payments for the loan are commodity linked. The former one is constructed as a zero coupon bond with a notional linked to a commodity, i.e.

the notional is calculated as 100% plus/minus a return realized through the linked commodity. The latter one is constructed as a coupon bond where a fixed coupon is negotiated and it is up or down graded depending on the realized commodity return.

Because the trader has to ensure a fully collateralized commodity investment, the structured note still includes an interest component.

Commodity linked structured notes become more and more popular because many investors already know structured notes from equity markets and do not need to care about rolling futures and credit risk. Investors seeking exposure to commodities are generally not comfortable with the credit risk of commodity producers. Linked notes demerge the wanted commodity price risk from the unfavored credit risk aspects of such transactions because they are usually offered by high credit grade issuers. Over

this, they are designed to meet investors needs and separate them from commodity producer and consumer requirements.

Finally a regulatory change in commodity mutual fund markets will force the de-mand for commodity linked interest rate securities.

2.3.1.5 Certificates

A common vehicle to get commodity index exposure in Europe are certificates.

Formally they securitize an obligation of the issuer with a regularly claim for interest coupon payments. That means that the investor does not purchase stocks or shares of a mutual fund, he simply lends his money to the issuer. Certificates generally replicate the price evolvement of an underlying stock or index and therefore count into the group of derivatives. A major characteristic of derivatives is to have a maturity: so do certificates. Nowadays, there are open-end versions, which include an internal rolling mechanism.⁵⁰

Certificates emerge the whole credit risk of the issuer what makes them an unattrac-tive investment vehicle for institutional investors but they are very famous in retail business. The drawbacks of covered overpricing and credit risk are little communi-cated. But their major advantage is high liquidity. Over this, certificates are gener-ally available in many customized versions including refunding conditions equipped with guarantees, bonuses, caps and/or currency risk hedging facilities. Following [Zagst e.a. 2006] they can be a performance increasing addition to traditional stock and bond retail portfolios.

2.3.2 Managed Futures Funds

Managed futures funds are managed by commodity trading advisors (CTAs). These trading advisors manage client’s assets by using global futures markets as an invest-ment medium. This is the main difference between a CTA and an ordinary trader.

Former have research based investment strategies, including diversification over dif-ferent markets, risk managing and loss limiting systems whereby ordinary traders generally are generally just experts in one market. In contrast to traders, who are usually 100% in the market, CTA’s mainly just invest 10-25% of the assets under management to absorb losses while waiting for profitable trades.⁵¹

50See [Gong Huber Lanzinner 2006].

51See Managed Account Research, Inc.;

http : \ \ www.ma − research.com \ managed account vs self − directed.html

Investment management professionals have been working with managed futures

Investment management professionals have been working with managed futures