ECON6020 Commodity Derivatives and Risk Management ... · ECON6020 Commodity Derivatives and Risk...

Unit study package code: ECON6020

Mode of study: Internal

Tuition pattern summary: Note: For any specific variations to this tuition pattern and for precise information refer to the Learning Activities section.

Individual Study: 1 x 12 Hours Once-only Block Teaching: 6 x 6 Hours Semester

This unit does not have a fieldwork component.

Credit Value: 25.0

Pre-requisite units: 312811 (v.0) Mineral Finance and Project Evaluation 601 or any previous version OR ECON6015 (v.0) Mineral Finance and Project Evaluation or any previous version

Co-requisite units: Nil

Anti-requisite units: Nil

Result type: Grade/Mark

Approved incidental fees: Information about approved incidental fees can be obtained from our website. Visit fees.curtin.edu.au/incidental_fees.cfm for details.

Unit coordinator: Title: DrName: Bryan MaybeePhone: +618 9266 9120Email: [email protected]: Building: P01 - Room: 106A

Teaching Staff: Name: Bryan MaybeePhone: +618 9266 9120Email: [email protected]: Building: P01 - Room: 106A

Administrative contact: Name: Margot Stacy JavilloPhone: 08 9266 1205Email: [email protected]: Building: P01 - Room: 116B

Learning Management System: Blackboard (lms.curtin.edu.au)

Unit Outline

ECON6020 Commodity Derivatives and Risk Management Trimester 2, 2016

Curtin Business School (CBS) Department of Minerals and Energy Economics

ECON6020 Commodity Derivatives and Risk Management Perth City Campus 18 Mar 2016 Department of Minerals and Energy Economics, Curtin Business School (CBS)

Page: 1 of 12CRICOS Provider Code 00301J

The only authoritative version of this Unit Outline is to be found online in OASIS

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Acknowledgement of Country We respectfully acknowledge the Indigenous Elders, custodians, their descendants and kin of this land past and present.

Syllabus This unit will focus primarily on derivative instruments that can be used for the hedging of risk in the minerals and energy industries, specifically the use of futures contracts, options and swaps as they pertain to interest rates, currencies and commodities. However, for the sake of completeness, the characteristics of options on shares and fundamental methods to evaluate them will also be discussed. As well, students will be introduced to the creation and implementation of a hedging policy, as well as some practical applications of derivatives and derivative theories.

Introduction Derivatives have become an important part of finance that can be used by both investors and managers for different purposes ranging from speculation to the hedging of risk. While both uses of derivative securities are an important component of finance, and will be discussed, Commodity Derivatives and Risk Management will focus primarily on the use of these instruments for the hedging of risks in the minerals and energy industries.

The intent of the unit is to introduce students to derivative markets and the pricing and valuation of fundamental derivative instruments, while providing a context for their application as tools that can be used to hedge and mitigate risk. Following an introduction to derivatives, the unit will focus on the pricing and valuation of the key derivative instruments; forward/futures contracts and options. The focus then shifts to more advanced derivatives, based on these fundamental instruments that can be used as hedging tools for some of the major risks found in the minerals and energy industries. The unit then shifts from the theoretical to the practical, and looks at hedging strategies that can be undertaken with these derivative instruments, as well as some of the requirements for creating and implementing a hedging policy.

Commodity Derivatives and Risk Management is a relatively advanced unit in Business Finance. As such it presupposes that participants have already developed a degree of familiarity with fundamental accounting and business finance principles during a previous degree or from having already attended either Resource Sector Finance, or Mineral Finance & Project Evaluation.

While rigorous and quantitative in character, the course is not designed to turn participants into “overnight experts” in derivatives trading. It will however place future managers in the resources sector in a position to recognize hedging opportunities, and communicate effectively with specialists in the field by becoming capable of understanding, interpreting and explaining potential opportunities. The course will provide an ideal “springboard” for those participants who may find the subject fascinating and who, as a consequence, may wish to pursue it in further depth.





Unit Learning Outcomes All graduates of Curtin University achieve a set of nine graduate attributes during their course of study. These tell an employer that, through your studies, you have acquired discipline knowledge and a range of other skills and attributes which employers say would be useful in a professional setting. Each unit in your course addresses the graduate attributes through a clearly identified set of learning outcomes. They form a vital part in the process referred to as assurance of learning. The learning outcomes tell you what you are expected to know, understand or be able to do in order to be successful in this unit. Each assessment for this unit is carefully designed to test your achievement of one or more of the unit learning outcomes. On successfully completing all of the assessments you will have achieved all of these learning outcomes.

Your course has been designed so that on graduating we can say you will have achieved all of Curtin's Graduate Attributes through the assurance of learning process in each unit.

Curtin's Graduate Attributes

Learning Activities The objective of Commodity Derivatives and Risk Management is to introduce students to derivative markets, as well as some of the derivative securities that are traded in those markets. This unit will focus primarily on derivative instruments that can be used for the hedging of risk in the minerals and energy industries, specifically the use of futures contracts, options and swaps as they pertain to interest rates, currencies and commodities. However, for the sake of completeness, the characteristics of options on shares and fundamental methods to evaluate them will also be discussed. As well, students will be introduced to the creation and implementation of a hedging policy, as well as some practical applications of derivatives and derivative theories.

On successful completion of this unit students can:Graduate Attributes addressed

1 Analyse the range of globally available derivative instruments that can be used for mitigating risk and explain the relative importance of hedgers and speculators in markets

2 Price and value the range of derivative instruments available to hedge risk within the minerals and energy sectors

3 Assess the effectiveness of financial instruments (and the range of available commodity and currency derivatives) to mitigate the risks faced across a range of mineral and energy commodities

4 Identify and use various derivative instruments to hedge risk within the minerals and energy sectors

Apply discipline knowledge Thinking skills (use analytical skills to solve problems)

Information skills (confidence to investigate new ideas)

Communication skills Technology skillsLearning how to learn (apply principles learnt to new situations) (confidence to tackle unfamiliar problems)

International perspective (value the perspectives of others)

Cultural understanding (value the perspectives of others)

Professional Skills (work independently and as a team) (plan own work)

Find out more about Curtin's Graduate attributes at the Office of Teaching & Learning website: ctl.curtin.edu.au





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Learning Resources Other resources

There is no single textbook that covers the whole spectrum of the material examined in this course in the context of the minerals and energy industries. As a consequence, readings that supplement the course notes for this unit will be drawn from numerous sources, and are either available via the Curtin University library or will be made available on the Blackboard site through eReserve prior to the commencement of the unit. While there is no required text for this unit, one of the following textbooks are highly recommended as a general reference.

Hull, John C. 2011. Fundamentals of Futures and Options Markets (7th Edition). Boston, MA: Prentice-Hall.

Sundaram, R. and Das, S. 2011. Derivatives: Principles and Practice (1st Edition). New York, NY: McGraw-Hill/Irwin.

Suggested Readings (available on eReserve via Blackboard)

Black, F. and Scholes, M. 1973. The pricing of options and corporate liabilities. Journal of Political Economy, 81, pp. 637-654.

Bodie, Z., Kane, A. And Marcus, A. 2009. Investments (8th Edition). Boston, MA: McGraw-Hill/Irwin, pp. 760-770 & 802-814.

Brealey, R., Myers, S. And Allen, F. 2011. Principles of Corporate Finance (10th Edition). New York, NY: McGraw-Hill/Irwin, pp. 46-59.

Chorafas, D. 2008. Introduction to Derivative Financial Instruments: Options, Futures, Forwards, Swaps, and Hedging. New York, NY: McGraw-Hill, pp. 227-242.

Linsmeier, T. And Pearson, N. 1996. Value at Risk. Association for Investment Management and Research, March/April, pp. 47-67. (http://www.exinfm.com/training/pdfiles/valueatrisk.pdf)

Ripple, R. 2009. International energy derivatives markets (Chapter 30), In International Handbook on the Economics of Energy (Eds. Evans, J. And Hunt L.). Cheltenham, UK: Edward Elgar, pp. 705-739.

Rudenno, V. 2004. The Mining Valuation Handbook (2nd Edition). Milton, Queensland: John Wiley & Sons Australia, pp. 167-176.

Torries, T. 1998. Evaluating Mineral Projects: Applications and Misconceptions. Littleton, CO: Society for Mining, Metallurgy, and Exploration, Inc., pp. 93-98.

Additional References

Benninga, S. 2007. Financial Modelling (3rd Edition). Cambridge, MA: The MIT Press.

Chorafas, D. 2008. Introduction to Derivative Financial Instruments: Options, Futures, Forwards, Swaps, and Hedging. New York, NY: McGraw-Hill.

Guj, P. 2006. Mineral Project Evaluation – Dealing with Uncertainty and Risk (Chapter 12), In Australian Mineral Economics: Monograph 24 (Ed. Maxwell, P.). Carleton, Victoria: AusIMM.

Hull, John C. 2009. Options, Futures and Other Derivatives (7th Edition). Upper Saddle River, NJ: Prentice-Hall.

Torries, T. 1998. Evaluating Mineral Projects: Applications and Misconceptions. Littleton, CO: Society for Mining, Metallurgy, and Exploration, Inc.





http://www.exinfm.com/training/pdfiles/valueatrisk.pdf

Assessment Assessment schedule

Detailed information on assessment tasks

1. Assessment 1 is an option pricing assignment that is to be completed in small groups, and presented to the class.

2. Assessment 2 is an individual hedging report that students will complete based upon the lecture materials.

3. Assessment 3 is a simulation exercise that will be completed by students individually in the 2 weeks following the intensive session. This assignment will require students to submit progress reports and obtain new information on a periodic basis through Blackboard.

4. Assessment 4 is a final examination that will be based upon all of the material covered in the intensive session.

Pass requirements

Students must attend the intensive session and complete all assessments, receiving a combined mark of 50%

Fair assessment through moderation

Moderation describes a quality assurance process to ensure that assessments are appropriate to the learning outcomes, and that student work is evaluated consistently by assessors. Minimum standards for the moderation of assessment are described in the Assessment and Student Progression Manual, available from policies.curtin.edu.au/policies/teachingandlearning.cfm

Late assessment policy

This ensures that the requirements for submission of assignments and other work to be assessed are fair, transparent, equitable, and that penalties are consistently applied.

1. All assessments students are required to submit will have a due date and time specified on this Unit Outline. 2. Students will be penalised by a deduction of ten percent per calendar day for a late assessment submission

(eg a mark equivalent to 10% of the total allocated for the assessment will be deducted from the marked value for every day that the assessment is late). This means that an assessment worth 20 marks will have two marks deducted per calendar day late. Hence if it was handed in three calendar days late and given a mark of 16/20, the student would receive 10/20. An assessment more than seven calendar days overdue will not be marked and will receive a mark of 0.

Task Value % Date DueUnit Learning Outcome(s)

Assessed

1Option Pricing Presentation 20 percent Week: 27th July 2016

Day: Wednesday Time: 09:00

1,2

2Hedging Report 15 percent Week: 29th July 2016

Day: Friday Time: 09:00

2,3,4

3

Simulation Exercise 35 percent Week: 12th August 2016 Day: Multiple Submissions Time: 09:00

2,3,4

4Final Examination 30 percent Week: 30th July 2016

Day: Saturday Time: 09:00

1,2,3





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Assessment extension

A student unable to complete an assessment task by/on the original published date/time (eg examinations, tests) or due date/time (eg assignments) must apply for an assessment extension using the Assessment Extension form (available from the Forms page at students.curtin.edu.au/administration/) as prescribed by the Academic Registrar. It is the responsibility of the student to demonstrate and provide evidence for exceptional circumstances beyond the student's control that prevent them from completing/submitting the assessment task.

The student will be expected to lodge the form and supporting documentation with the unit coordinator before the assessment date/time or due date/time. An application may be accepted up to five working days after the date or due date of the assessment task where the student is able to provide an acceptable explanation as to why he or she was not able to submit the application prior to the assessment date. An application for an assessment extension will not be accepted after the date of the Board of Examiners' meeting.

Deferred assessments

If your results show that you have been granted a deferred assessment you should immediately check your OASIS email for details.

Deferred examinations/tests will be held from 13/08/2016 to 03/12/2016 . Notification to students will be made after the Board of Examiners’ meeting via the Official Communications Channel (OCC) in OASIS.

Supplementary assessments

Supplementary assessments are not available in this unit.

Referencing style

The referencing style for this unit is Chicago.

More information can be found on this style from the Library web site: http://libguides.library.curtin.edu.au/referencing.

Copyright © Curtin University. The course material for this unit is provided to you for your own research and study only. It is subject to copyright. It is a copyright infringement to make this material available on third party websites.

Academic Integrity (including plagiarism and cheating) Any conduct by a student that is dishonest or unfair in connection with any academic work is considered to be academic misconduct. Plagiarism and cheating are serious offences that will be investigated and may result in penalties such as reduced or zero grades, annulled units or even termination from the course.

Plagiarism occurs when work or property of another person is presented as one's own, without appropriate acknowledgement or referencing. Submitting work which has been produced by someone else (e.g. allowing or contracting another person to do the work for which you claim authorship) is also plagiarism. Submitted work is subjected to a plagiarism detection process, which may include the use of text matching systems or interviews with students to determine authorship.

Cheating includes (but is not limited to) asking or paying someone to complete an assessment task for you or any use of unauthorised materials or assistance during an examination or test.

From Semester 1, 2016, all incoming coursework students are required to complete Curtin’s Academic Integrity Program (AIP). If a student does not pass the program by the end of their first study period of enrolment at Curtin, their marks will be withheld until they pass. More information about the AIP can be found at: https://academicintegrity.curtin.edu.au/students/AIP.cfm

Refer to the Academic Integrity tab in Blackboard or academicintegrity.curtin.edu.au for more information, including student guidelines for avoiding plagiarism.

Information and Communications Technology (ICT) Expectations





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http://libguides.library.curtin.edu.au/referencing

https://academicintegrity.curtin.edu.au/students/AIP.cfm

http://academicintegrity.curtin.edu.au/

Curtin students are expected to have reliable internet access in order to connect to OASIS email and learning systems such as Blackboard and Library Services.

You may also require a computer or mobile device for preparing and submitting your work.

For general ICT assistance, in the first instance please contact OASIS Student Support: oasisapps.curtin.edu.au/help/general/support.cfm

For specific assistance with any of the items listed below, please contact The Learning Centre: life.curtin.edu.au/learning-support/learning_centre.htm

l Using Blackboard, the I Drive and Back-Up files l Introduction to PowerPoint, Word and Excel

Additional information

Online Supplementation of this unit This unit is supplemented in Blackboard, a web-based learning environment that is to be used in conjunction with face to face delivery of the unit. If you are new to online environment, we encourage you to look at the CBS Online section of the website at http://business.curtin.edu.au/schools/cgsb/current_students/studying_online/index.cfm

This website provides useful information about Blackboard. Should you require assistance of any kind, please make sure you direct your queries to the appropriate area in order to get the result you need quickly. For content-related issues, contact your Lecturer. For technical issues relating to your online unit, please fill in the online help form available from the above website. The access to your online unit in Blackboard will become available once the trimester has started.

It is recommended that you access your online unit in Blackboard through OASIS (your student portal at Curtin), where it is located under “My Studies” tab. You can also use a direct link: http://www.lms.curtin.edu.au/ . If you use a direct link, you will have to use your login and password, which are exactly the same as for OASIS. If you have not activated your OASIS logon, please go to http://www.oasis.curtin.edu.au and follow the prompts. If you are a new student, please note that to activate OASIS logon you have to know your student number, which is to be found on your letter of offer.

Scheduled CITS outages

Scheduled Maintenance occurs when Curtin Information Technology Services (CITS) takes one or more University systems offline for up to 12 hours to complete routine repairs. During these Scheduled Maintenance windows major maintenance may take place and may affect multiple systems. You should plan for limited or no access to Curtin systems and network, including the possible absence of internet connectivity.

You will be notified two weeks prior to the Scheduled Maintenance window with a detailed list of affected IT services and their associated outage windows. Notices about scheduled maintenance periods are posted in OASIS and will indicate which systems will be affected. When Blackboard is affected specifically, notices about upcoming outages will also be posted on the Blackboard login page. Please pay attention to these notices as they will affect your access to the system (thus your assessment submission!).

You may also refer to the following link for updates on maintenance work (scroll to the bottom of the screen for “Blackboard Maintenance”): http://cits.curtin.edu.au/support/scheduled_maintenance_service_availability.cfm

Submission of all Written Assignments through Turnitin

The majority of your written assessments will be submitted via Turnitin on Blackboard (submission links are located under the Assessment link on the left hand menu in Blackboard). You will also be given the option to upload a draft copy of each assessment to Turnitin prior to your final submission. If you choose to upload a draft (referred to in Turnitin as a “Revision”), Turnitin will generate an Originality Report to help you pinpoint any referencing issues. Make good use of this feedback to improve your writing before uploading your final submission.

If you require further information about how to reference correctly, please visit the Library website





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http://libguides.library.curtin.edu.au/content.php?pid=141214

( http://libguides.library.curtin.edu.au/content.php?pid=141214), book in to a Library workshop, or access the online Referencing module in the SUCCESS for CGSB Students Blackboard site (this link to the SUCCESS site appears alongside the other Blackboard sites you have access to).

Assessment Guidelines

Marks for each assignment are posted into the Blackboard Grade Centre (assessable through My Grades section in Blackboard), which is the University’s official repository for all grades.

This policy, taken from the University’s Assessment and Student Progression Policy, ensures requirements for submission of assignments and other work to be assessed, are fair, transparent, equitable and penalties are consistently applied.

Assessment Extension Policy

The Assessment and Student Progression Manual details the University’s policies and procedures that ensure that the evaluation and approval of requests to complete an assessment task or submit an assignment (or other work) at a later date is fair, transparent, equitable and auditable.

Below is an overview of key points of the policy. Students are strongly advised to read the policy in full before applying for the extension:

l An application for an Assessment Extension must be submitted prior to the assessment date/time (for an assessment event) or due date/time (for submission of work). If an extension is granted, the Unit Coordinator will determine a new due date and time. An extension will normally be up to 7 working days after the initial due date/ time.

l Where an Assessment Extension extends beyond the date of the Board of Examiners the interim grade ‘Deferred Assessment’ shall be used.

Criteria for Assessment Extension

Exceptional circumstances that may warrant approval of an assessment extension include but are not limited to:

l Student illness, injury, or medical condition of such significance that completion of the assessment task was not possible and this supported by a medical certificate or equivalent;

l Family issues (for example family injury, illness or bereavement etc.) of such significance that completion of the assessment task was not possible. Supporting documentation would be required;

l Commitments to participate in elite sport or other activities that warrant favourable consideration; l Commitments to assist with emergency service activities (for example, bushfire protection); or l Unavoidable and unexpected critical work commitments (for example, relocation, changes to fly-in/fly-out

schedules). A letter from the employer clearly supporting the student’s claim is required.

(Please note: heavy workload will not normally provide a basis for granting an extension. Students are asked to manage their workloads in relation to both their organisation and their course of study.)

Application for Assessment Extension

l Application for Extensions must be made on the appropriate form (Assessment Extension Form) http://students.curtin.edu.au/administration/forms.cfm and should be submitted via email to the Unit Coordinator before the assessment due date/ time.

l An application may be accepted up to 5 working days after the due date time where the student is able to provide an acceptable explanation as to why they were not able to submit the application prior to the assessment date.

The Unit Coordinator shall notify the student of the outcome of their application for assessment extension within 5 working days of the application. If the assessment is rejected the student will be advised in writing of the reasons for this and of any further right of appeal.

Referencing Style

Students must use the Chicago author-date 16th edition referencing style when preparing assignments. More information can be found on this style from the Curtin Library website:





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http://students.curtin.edu.au/administration/forms.cfm



When using EndNote, the style system that should be used is Chicago 16th B Curtin.

Important Information for Students:

Please read the Current Students section of the CGSB website (http://business.curtin.edu.au/schools/cgsb/current_students/index.cfm) for further information on the following:

l unit availability l timetables l re-enrolment procedures l fee information l the CGSB Alumni Chapter, and l Emergency Procedures

Any enquiries concerning your enrolment can be sent to [email protected]

Enrolment

It is your responsibility to ensure that your enrolment is correct - you can check your enrolment through the eStudent option on OASIS, where you can also print an Enrolment Advice.

Student Rights and Responsibilities It is the responsibility of every student to be aware of all relevant legislation, policies and procedures relating to their rights and responsibilities as a student. These include:

l the Student Charter l the University's Guiding Ethical Principles l the University's policy and statements on plagiarism and academic integrity l copyright principles and responsibilities l the University's policies on appropriate use of software and computer facilities

Information on all these things is available through the University's "Student Rights and Responsibilities" website at: students.curtin.edu.au/rights.

Student Equity There are a number of factors that might disadvantage some students from participating in their studies or assessments to the best of their ability, under standard conditions. These factors may include a disability or medical condition (e.g. mental illness, chronic illness, physical or sensory disability, learning disability), significant family responsibilities, pregnancy, religious practices, living in a remote location or another reason. If you believe you may be unfairly disadvantaged on these or other grounds please contact Student Equity at [email protected] or go to http://eesj.curtin.edu.au/student_equity/index.cfm for more information

You can also contact Counselling and Disability services: http://www.disability.curtin.edu.au or the Multi-faith services: http://life.curtin.edu.au/health-and-wellbeing/about_multifaith_services.htm for further information.

It is important to note that the staff of the university may not be able to meet your needs if they are not informed of your individual circumstances so please get in touch with the appropriate service if you require assistance. For general wellbeing concerns or advice please contact Curtin's Student Wellbeing Advisory Service at: http://life.curtin.edu.au/health-and-wellbeing/student_wellbeing_service.htm






http://business.curtin.edu.au/schools/cgsb/current_students/index.cfm

mailto:[email protected]

http://students.curtin.edu.au/rights/

mailto:[email protected]

http://eesj.curtin.edu.au/student_equity/index.cfm

http://www.disability.curtin.edu.au/

http://life.curtin.edu.au/health-and-wellbeing/about_multifaith_services.htm

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Recent unit changes Students are encouraged to provide unit feedback through eVALUate, Curtin's online student feedback system. For more information about eVALUate, please refer to evaluate.curtin.edu.au/info/.

Recent changes to this unit include:

The focus of this unit is on the derivative instruments that are available to the minerals and energy sector and how those instruments can be used for hedging purposes. This unit is now delivered in a blended format that includes a 2-week post intensive session simulation assignment.

To view previous student feedback about this unit, search for the Unit Summary Report at https://evaluate.curtin.edu.au/student/unit_search.cfm. See https://evaluate.curtin.edu.au/info/dates.cfm to find out when you can eVALUate this unit.





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Program calendar

Session Class Date

Module Topic Suggested Readings Assessment Due Dates

1 25 July Introduction

l Introduction to derivative securities

l Review of interest rates

Readings to review discounting, compounding, interest rates, and the valuation of bonds (Torries, 1998; Brealey et al., 2011)

Forward and Futures Contracts

l Properties of forward and futures contracts

l Pricing of forward and futures contracts

l Forward and futures hedging strategies

Readings on forward and futures contracts and markets (Ripple, 2009; Bodie et al., 2009)

2 26 July Options Markets and Pricing

l Characteristics of options

l Parameters of value l Pay-off patterns l Pricing methods l Pricing a share option l Binomial lattice model l Black –Scholes formula

Readings on the characteristics and pricing of options (Black and Scholes, 1973)

3 27 July Group Presentations based on Assignment #1

Assessment 1

Interest Rate and Currency Derivatives

l Interest rate futures l Swaps l Currency options

Readings on interest rate derivatives (Bodie et al., 2009)

Commodity and Energy Derivatives

l Commodity futures l Futures options

Readings on the pricing and markets for commodity and energy derivatives (Ripple, 2009; Bodie et al., 2009)

4 28 July Risk Management Readings on risk management (Linsmeier and Pearson, 1996; Chorafas, 2008)





l The Greeks l Value at risk

5 29 July Discuss Assignment #2 Assessment 2

Practical Hedging

l Introduction to hedging l Formulating and

implementing a hedging policy

l Options trading strategies

Reading on financial and commodity hedging (Rudenno, 2004)

Review and Introduction to Simulation Assignment

6 30 July Examination to start at 9:00 am

Examination

7 12 August

Simulation Assignment Assessment 3





ECON6020 Commodity Derivatives and Risk Management ... · ECON6020 Commodity Derivatives and Risk...

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