Introduction to Commodities
Course Outline
Current commodity markets have been growing and evolving for almost thirty years. Today, markets are more transparent, traded by a much more diverse group of financial participants and have been significantly impacted by globalisation vs. regional markets of the past. The key to participating successfully in these markets is to understand the unique features that exist in each product class, the impact of fundamentals on price action, and the limitations of current financial products in managing the risk.
This course will review the development of commodity markets, describe current commodity markets including how products are defined and traded, and will provide a discussion of challenges faced in current markets through new regulations, globalisation and unprecedented volatility. Practical applications will be utilised in each segment of the course.
Who The Course is For
- Traders
- Sales/Marketing
- Financial Product Structurers
- Investment Bankers
- Risk Managers
- Fund Managers
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Prior Knowledge
Basic knowledge of finance required.
This
program is eligible for 16 Continuing Education credit hours from the
CFA Institute. If you are a CFA Institute member, CE credit for your participation
in this program will be automatically recorded in your CE Diary.
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Day One
Basic framework of commodity markets
- Overview of each commodity sector and description of key products
- Which commodities are traded on exchanges?
- Price mechanisms of physical and financial markets
- Introduction to energy/oil and metals
How to build a forward curve
- Introduction to seasonality characteristics of each commodity sector
- What are contango and backwardation curves?
- Using historical data and understanding potential limitations
Workshop: Create a forward curve
How to trade commodities
- Where to access and trade specific commodity products
- Difference between futures and forward contracts
- Understand contract notification and physical delivery
- Where to source historical data and timely market research
- Managing credit concerns with trading techniques
Volatility and Correlation
- Review of volatility and correlation principles
- Key characteristics and importance in each unique commodity sector
- Volatility smile and skew and their relevance to commodity pricing and trading
Workshop: Evaluate historical data and build volatility curve
Commodity Relationships
- What are the key inter-relationships between commodity markets?
- What are the key cross-commodity products?
- Bio-fuels: liquidity and impact on traditional commodity products
- Introduction to transportation markets including LNG supply chain
Workshop: Freight and product transportation
Day Two
Commodity Option Markets
- Review of basics
- Examples of simple and exotic options found in markets
- Pricing strategy for options with physical delivery
- Common pricing and hedging challenges
Workshop: Client hedging examples: oil producer hedging, gas distributor hedging
Electricity and Natural Gas markets
- Regional electricity and natural gas market design – impact on trading liquidity
- Introduction to spark spreads, dark spreads and transmission spread options
- What impact does global emissions policy have on energy markets?
- How to price emissions in electricity markets
Workshop: Independent Power Producer: Spark Spread Hedge
Trading Styles and Techniques
- Fundamental and technical trading styles
- Impact of ‘big players’ in specific markets
- Evaluate physical or financial trading for optimal portfolio risk management
- Emissions and weather derivatives – how to maximize value in portfolio
- Understand the impact of market sentiment
Workshop: Trading Strategy: evaluate your trading decisions during market events
Commodity Markets: What will happen tomorrow?
- Regulation and oversight issues/changes
- Water – how long until liquid products are available?
- Enhanced weather derivative products – value proposition for the portfolio
- Key developments to watch for in the next two years
- Historical blow-ups/mistakes in commodity markets
