Second NUS Workshop on Risk and Regulation

Title:Risk Contributions in Simulations of Commodity Derivatives

Abstract:

It is well-known fact the importance of commodities as an asset class alternative to equities and bonds. Since more and more commodity-based derivatives are traded in the financial markets. it is important to be able to properly compute the risk for these products. We review the importance of convenience yield in commodity-derivative pricing and describe how to compute risk simulations for commodity futures and futures spreads. We then devise and ad-hoc procedure to compute the components of risk due to different variables such as the underlying commodity price, interest rates, and the convenience yield. We conclude by showing some numerical results that highlight the importance of convenience yield in computing risk of commodity derivatives.
Keywords:    Risk management, risk contributions, and commodity derivatives

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