Summary: Commodity Futures & Options Markets

Read the summary and the most important questions on Commodity Futures & Options Markets

• Week 1

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• What is the formule for Shareholder Value?

  t= planning horizon in years
  R= costs of capital adjusted for risk
  Ai= net cash flow after taxation in year I
  
  
  The higher the R the lower the Shareholder Values
  --> dus je wilt een lage R

• What are stable and predictable cash flows?

  • Lower Cost of Capital 
    
  • Increased Customer satisfaction 
  • Loyalty 
  • Retention 
  • Marketing Channel Contractual Relationship 
  • Management 

  
  
  Vulnerability and Volatility of Cash Flows

• What is the target of a company?

  A healthy balance between risk and return 
  
  

  • Increased risk --> High profits?
  • Increased risk --> higher expected profit?
  • The issue: Profit expectation (verwachting) versus profit volatility (beweeglijkheid) 

• What needs to be done in order to chose between 2 companies? And to which 3 questions do you need to look?

  A balance must be struck between risk and return, through risk shifting or risk stacking. 
  
  

  • Know your own preference functions (target function)
  • Know the risk-return characteristics of the market
  • Develop methods (rules) for making decisions in uncertain situations 

• What constitutes (vormt) risk?

  • Price Fluctuations
    
  • A possible price fall below a certain price 
  • Margin Fluctuations 
  • Possibility of not achieving a certain return 
  • ......

• What is a risk-management strategie?

  Diversification 
  

  • Producing, trading, or processing several products & services 
  • Pool
  • Deliver/purchase often --> 'average' price

• What is Risk Attitude?

  The extent to which one is willing to take risks (risk content) for a certain reward

• What is Risk Perception?

  Your subjective interpretation of the probability that the risk content becomes manifest

• What are the risk-management Instruments?

  • Centrally traded 
    
  • Futures contracts 
  • Options 
  • De-centrally traded 
  • Fixed Contracts 

• Where does the business risks result from

  Results form the inability to accurately predict quantity and price outcomes 
  
  Quantity risk is a function of 
  

  • Level of operating capital 
  • Producer's ability to combine resources
  • External conditions (weather)