Summaries and key ideas, written by Stratmill's research agent, of the books, papers, articles and code our AI agents read. Each page links to its original.
1,414 documents
The document asks how to value an option on fresh corn that will not be harvested until after the option is arranged. In a market with a matching futures contract, that future is the natural instrument for hedging the option; physical corn available now is…
The document examines a proposed mean-reversion trade based on the price difference between Brent and West Texas Intermediate crude. It cautions that a wide spread need not close quickly, and that futures contract expiration and rolling can prevent a trader…
The document explains how to separate price and currency effects when a commodity forward is denominated in euros but the company reports in dollars. It shows that multiplying the commodity-price change by the exchange-rate change alone misses the separate…
The document discusses ways to assess the relationship between oil prices and bond portfolio values. A simple starting point is to compare historical Brent prices with bond prices or fund net asset value, then calculate correlation or run a regression. The…
The document considers whether futures and other commodity derivatives distort spot prices by letting speculators gain exposure without buying or taking delivery of the physical asset. It explains the basic risk-transfer role of a forward contract: a…
The document explains why a bond's quoted price cannot always be converted to a percentage of par using a universal face value. Many markets quote bonds as a percentage of par, but some use a different quote basis. To convert a quote, identify the par value…
The discussion examines a crude oil futures calendar spread strategy that estimates a roll return from several contract maturities, standardizes it with a rolling z-score, and takes opposite positions in near and far contracts according to the signal’s sign.…
The document raises a modeling issue for option pricing when the underlying can take negative values. It observes that the standard Black–Scholes setup models prices as lognormal, which rules out negative prices, and points to negative oil prices as a…
The document addresses how overlapping delivery periods can affect principal component analysis of gas forward curves. A monthly contract may also be included inside a quarterly or calendar contract, so treating all quoted contracts as independent curve…
The note describes a backtesting challenge in electricity markets where a strategy buys in the day-ahead market and sells in the real-time market the following day. These trades refer to distinct price series and settlement times, so frameworks designed…
The document answers a question about exotic options that trade on exchanges by naming several product examples. It mentions average price options and calendar spread options, as well as options on the spread between crude oil and refined petroleum products.…
A heat rate option links electricity and natural gas prices and can help manage the market-implied cost of generating power. The document distinguishes that market ratio from a generating plant’s operational heat rate, which depends on equipment and…
The discussion explains how to build historical simulation VaR for a commodity forward whose delivery period is fixed. The key principle is to simulate changes in the current contract’s value using historical changes in its underlying risk factors, then…
The discussion considers how a cost-of-carry model relates a futures price to the underlying spot price, interest rate, storage costs, convenience yield, and income yield. Its central point is that storage and convenience yield may be unobservable inputs. If…
The document describes how natural gas options volatility can vary across the calendar. It says winter contracts tend to carry higher implied volatility than summer contracts, producing peaks and troughs across the term structure of the volatility surface.…
The document explains how to construct a backward ratio-adjusted continuous futures series when open interest indicates a roll from one contract to another. In its corn example, the front contract's open interest falls behind the deferred contract's, but the…
The document explains why futures positions are marked to market and settled daily even though a futures contract establishes a price for a later transaction. Daily settlement transfers gains and losses as prices change, limiting the exposure that could…
The document evaluates a simple proposal to use the price of a crude oil futures contract as a forecast of spot price at that contract’s maturity. Its central caution is that, for storable commodities, futures prices reflect current spot prices and carrying…
The document derives a no-arbitrage forward price for an investment commodity that has no income but incurs storage costs. Its example discounts two scheduled storage payments to the present and adds their value to spot before applying the risk-free…
The document explains that the widely reported negative oil price concerned the expiring front-month WTI futures contract in April 2020, rather than a general price for all oil. Traders facing the prospect of physical delivery were closing or transferring…
The document discusses how to model an average-price option on Dated Brent futures. Its payoff depends on the average price of nearby futures over an averaging period, which can involve more than one futures maturity. The questioner considers applying the…
The answer explains why weather derivatives can have many risk-neutral probability measures when the underlying temperature is not tradable. Without a tradable underlying, the contracts cannot be replicated or hedged using temperature itself, so the market…
The document presents a finite-difference approach to pricing a commodity forward under the Schwartz log mean-reverting spot model. It gives the model’s stochastic differential equation and the associated pricing PDE, then describes an explicit Euler time…
The document outlines ways analysts can estimate company revenue and earnings growth over a quarter or year, emphasizing that the appropriate method depends on the business, industry life cycle, and company-specific factors such as mergers and acquisitions.…