Risk Contributions in Simulations of Commodity Derivatives

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 an ad-hoc procedure to compute the components of risk due to different variables: the underlying commodity price, the 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.

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