Commodities, Markets and Market Commodities

Commodities

A commodity is a basic good that, for the purposes of commerce and trade, is interchangeable with other commodities of the same type. Examples include agricultural products such as wheat, corn, and beef; precious metals such as gold, silver, and copper; and energy resources such as coal, crude oil, and natural gas. Financial products that are traded, such as foreign currencies and indexes, are also considered to be commodities.

MineMarket has two types of commodities that are used for hedging: physical commodities and currency commodities.

Physical Commodities

A physical commodity is any material for which there is a demand, but which is supplied without qualitative differentiation across a given market. The prices of physical commodities are determined as a function of their market as a whole. Well established physical commodities have actively traded spot and derivative markets.

Each physical commodity is linked to an analyte definition, material type and/or list of products, for evaluation of other related materials. For example, copper concentrates contain gold, silver and copper that are evaluated as the corresponding commodity: gold bullion, silver bullion and copper grade A.

Currency Commodities

A currency commodity is currency pair that is traded in a foreign exchange market; for example, the Euro and the US Dollar (EUR / USD).

Each currency commodity is linked to a source currency and a destination currency, based on the currencies defined in the Currency/Exchange Editor.

Markets

In MineMarket, a market is a commodities exchange; that is, a legal entity where commodities are traded.

A new installation of MineMarket includes the following preconfigured markets, which can be edited and deleted:

  • COMEX (Commodity Exchange, Inc.)
  • LME (London Metal Exchange)
  • LSE (London Stock Exchange)
  • NYSE (New York Stock Exchange)
  • SHFE (Shanghai Futures Exchange)
  • SSX (Sydney Stock Exchange)
  • TSE (Tokyo Stock Exchange)

Market Price Series and Prompt Calendar Configuration

Markets also publish prices used in price series and forward price series.

Market configuration can include prompt calendars and prompts, which together are used to determine the prompt dates of prices in the price series with that source market.

Prompt calendars are used to determine the business days, and prompts are used to determine the offset or day of the month or week. Each market can have a single prompt calendar, and can have multiple prompts. For example, the London Metal Exchange (LME) publishes a 3-month prompt and a daily prompt with a 2-day offset. If the actual price is not yet available for the effective start date in the price series, the price at the prompt date in the forward curve is used.

If the market configuration does not include prompt calendars and prompts, when the actual price is not yet available for the effective start date in the price series, the price at the same date in the forward curve is used.

Market Commodities

The commodities are traded in standardised contracts; for example, 100 ounces of gold, or CAD 100,000. A hedge position can be for a single contract quantity, or for a multiple of this quantity.

In MineMarket, a market commodity is a template for creating hedge positions. The market commodity defines the commodity contract size and hedge position contract type (futures, options, swaps or spread). The market commodity also defines default values for the hedge positions; for example, the transaction type, broker and pricing information.

A commodity can be specified multiple times in the same market. This is typically done if its market contract quantity, contract margin, or default price series are different.

Settlement Methods

Settlement methods define additional configuration for market commodities used for options contracts: how the quotation period for the market price is determined, and when the options contract can be executed.

A new installation of MineMarket includes three default settlement methods that can be edited but not deleted:

  1. European
    • Quotation Period: Fixed
    • Options Execution: On Declaration Date
    • Price Estimation Model: Black-Scholes
    • Automatic Execution: True
  2. American
    • Quotation Period: Fixed
    • Options Execution: Up To Declaration Date
    • Price Estimation Model: Black-Scholes
    • Automatic Execution: Disabled
  3. Asian
    • Quotation Period: MOHE(0,0)
    • Options Execution: On Declaration Date
    • Price Estimation Model: Monte-Carlo with 1,000,000 simulations
    • Automatic Execution: Enabled

Volatility Curves

Volatility represents how much prices for a market commodity vary over time. When volatility is low, the prices are stable.

Volatility values are used in calculating the value of options contracts. Volatility is one of the inputs in the Black-Scholes and Monte Carlo models to calculate options pricing.

The date range of the market price calculation determines the date range of the volatility values that are used. Available volatility values in that date range are averaged. Missing volatility values are not interpolated or extrapolated.