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For internal use onlyFor internal use only
Commodities Derivatives TradingSridev Ramaswamy, Global Commodities, DB London
For internal use only
The commodities asset class is made up of very distinct sectors
Energy Metals (precious and industrials) Agriculture (livestock and grains)
Contrary to financial assets, commodities are physical assets. The market will be affected by
Supply farming capacity exploitation capacity discovery of new exploitation sites weather and climate
Demand production demand (raw materials) final consumption technological progress
Overview - The Commodities Landscape (I)Commodity Sectors and Market Influences
Sector Example
Energy Light CrudeHeating OilRBOB GasolineNatural Gas
Industrial Metals
AluminiumLeadCopperZincNickel
Precious Metals
GoldSilver
Agriculture CornWheatCoffeeSugarCocoaCoffeeSoybeans
Livestock Live CattleLean HogsFeeder Cattle
Commodity SectorsAsset Class Characteristics
2
For internal use onlySpeaker nameName of
Source: Bloomberg, 3 October 2011
16.6%
14.7%
8.2%
2.4%
-5.8%
-7.1%
-13.8%
-15.1%
-15.2%
-15.5%
-17.9%
-22.0%
-22.6%
-22.7%
-24.0%
-27.5%
-30.2%
-32.5%
-40% -30% -20% -10% 0% 10% 20%
Gold
Gas Oil
Heating Oil
Gasoline
Corn
Cof fee
Aluminium
WTI Crude Oil
Cocoa
Soybeans
Natural Gas
Wheat
Sugar
Lead
Zinc
Nickel
Copper
Cotton
Commodity Performance 2011 YTD
Overview - The Commodities Landscape (II)Performance of Selected Commodities
Commodity Scorecard 2011 YTD Commodity Scorecard 2010
Source: Bloomberg, Jan 2010 to Dec 2010
91.5%
76.9%
51.7%
46.7%
35.1%
34.0%
32.6%
29.1%
20.1%
20.0%
19.5%
19.2%
15.1%
11.5%
8.0%
-5.4%
-7.7%
-20.9%
-40% -20% 0% 20% 40% 60% 80% 100%
Cotton
Coffee
Corn
Wheat
Nickel
Soybeans
Copper
Gold
Heating Oil
Gas Oil
Gasoline
Sugar
WTI Crude Oil
Aluminium
Lead
Zinc
Cocoa
Natural Gas
Commodity Performance 2010
3
For internal use onlySpeaker nameName of
Commodities: Impressive Long-Run Returns
0%
100%
200%
300%
400%
500%
600%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
DBLCI MR Enhanced
DJ-UBSCI TR
U.S. Govt All
S&P 500
DB 3m T-Bill Index
Real Estate (UK IPD)
Inflation
Commodities (DBLCI MRE)
Commodities (DJ UBSCI)
Bonds (US Govt All)
Cash (3m T-Bills)
Equities (S&P 500)
Real Estate (UK IPD)
Inflation (CPI)
Total Return 11.68% 4.00% 6.06% 2.03% 0.19% 6.59% 2.44%Excess Return 9.65% 1.97% 4.03% 0.00% -1.84% 4.56% 0.41%
Source: Bloomberg, Data from 1 January 2001 to 3 October 2011
4
For internal use only
Performance Comparison vs. Alternatives
-0.5
-0.4
-0.3
-0.2
-0.1
0
0.1
0.2
0.3
0.4
0.5
0.6
Commodities (DBLCI MRE)
Commodities (DJ UBSCI)
Private Equity CTA FX Managers Hedge Funds Real Estate
Sharpe Ratio
Commodities (DBLCI MRE)
Commodities (DJ UBSCI)
Private Equity
CTAFX
ManagersHedge Funds
Real Estate
Total Return 12.07% 3.44% -0.47% 4.71% 2.19% 0.32% 0.32%Excess Return 10.06% 1.43% -2.48% 2.70% 0.18% -1.69% -1.68%Volatility 20.56% 19.52% 28.00% 7.57% 2.96% 4.12% 25.69%Sharpe ratio 0.49 0.07 -0.09 0.36 0.06 -0.41 -0.07
Source: Bloomberg, Data from 28 November 2003 to 3 October 2011
Private Equity: S&P Listed Private Equity Index - CTA: Newedge CTA Index - FX Managers: PBCI PGS Currency Managers Index - Hedge Funds: HFRX Global Hedge Fund Index - Real Estate: S&P REIT Index Period is different as all data was available together only from Nov 2003
5
For internal use onlySpeaker nameName of
Growth of Commodities as an Asset Class
6
In light of the superior risk-adjusted returns, diversification benefits and inflation protection,. there has been a significant increase in interest in commodities as an asset class,,
A very significant portion of this interest has come from pension funds and multi-asset funds in Europe and the US
Investor interest in commodities is likely to persist as the continuing presence of physical producers and consumers leads to continuing opportunities for investors
Commodity indices are mostly based on futures replication. Investors use predominantly indices to express their views, and close out their futures positions prior to contract expiry.
Producers and consumers are normally on the other side of these positions and are able to take physical delivery.
Given the inability of investors to take physical delivery, the market is dominated by physical producers and consumers.
0
40
80
120
160
200
Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10
Index investment flows by sector (US market, USD bn)
Livestocks
Softs
Grains
Precious & Base Metals
Energy
0.0
20.0
40.0
60.0
80.0
100.0
Feb-05 Feb-06 Feb-07 Feb-08 Feb-09 Feb-10
AU
M(U
S$
bn)
Commodity ETF AUM
Europe US
For internal use only
… for both vanilla and structured risk management solutions
‘BTU’ Swaps‘BTU’ Swaps‘Crack’ Spread Swaps‘Crack’ Spread Swaps
Collars (Min / Max’s)
Collars (Min / Max’s)
Asian OptionsEuropean Options
Asian OptionsEuropean Options
Floating / Floating Swaps (Basis Swaps)
Floating / Floating Swaps (Basis Swaps)Fixed / Floating SwapsFixed / Floating Swaps
Examples of Vanilla Products
Swaptions(Extendibles)Swaptions
(Extendibles)Barrier Options (Knock-in/out)
Barrier Options (Knock-in/out)
Producer Net Revenue HedgesProducer Net Revenue HedgesExtendableCollars
ExtendableCollarsRange SwapsRange Swaps
MonetizationMonetizationCommodity and Asset FinancingCommodity and Asset FinancingCredit Facilities for Commodity HedgingCredit Facilities for Commodity Hedging
Trigger Swaps(Curve Locks)Trigger Swaps(Curve Locks)
Examples of Structured Products
Examples of Complex Products
Load ShapeLoad Shape
Heat Rate OptionsHeat Rate Options
TermTermM & A Structuring and HedgingM & A Structuring and Hedging
Correlation Transactions
CorrelationCorrelation HybridsHybrids
For internal use only
Functions of a Trader
8
Pricing Risk Management Infrastructure & Analytics
For internal use only
Trade Development Context
9
Need for exposure Vehicle for exposure Models of product behaviour Robustness to externalities
For internal use only
Trade Development Process
10
Idea Generation Evaluation Filters Infrastructure feasibilities Profit potential and costs of operation
For internal use only
Role of Financial Mathematics
11
Tool for
Idea generation and evaluation for trade ideas (Stochastic calculus) Algorithmic or automatic trading Game theoretic stress tests Technical indicator and rule based trading News and event based impact analysis
For internal use onlySpeaker nameName of
Disclaimer
12
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