Financial Risk Management

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University of Edinburgh

Trading Silver and Copper
FRM Assignment

Lina LU ( s1111757) Yufei PANG ( s1145790) Jinsheng HU ( s1121232) Qi GAO ( s1150771)

2012-3-13

Contents
1. 2. 3. Introduction ................................................................................................................... 1 Market Analysis .............................................................................................................. 2 Forward curve ................................................................................................................ 3

4. Position building ................................................................................................................ 4 4.1 Assumptions ................................................................................................................ 4 4.2 Portfolio and Arbitrage ................................................................................................ 5 4.3 Efficient Frontier and Sharp ratio ................................................................................ 5 4.4 Trading Strategies ........................................................................................................ 6 5. Profit and loss Analysis ...................................................................................................... 8 6. Value at Risk .................................................................................................................... 12 6.1 The Historical Simulation ........................................................................................... 12 6.2 The Variance-Covariance Method ............................................................................. 13 6.3 Comparison and Back Test ........................................................................................ 15 7. Stress Test........................................................................................................................ 16 8. Margin account and exchange rate hedging ................................................................... 17 8.1 Margin ....................................................................................................................... 17 8.2 Foreign Exchange hedging ......................................................................................... 19 9. Conclusion ....................................................................................................................... 19 10. Interview........................................................................................................................ 21 References ........................................................................................................................... 22

1. Introduction
Metals can be divided into two categories, basic metal and precious metal respectively. Metal trading plays an essential role in financial activities, in that the spread of metal resources which either have constructive functions or decorative functions follows an uneven distribution around the world. The discovery of copper, as one of the oldest commodities, dates back to over 10,000 years ago.[1] The refining method may vary but it still dramatically dominates and shapes our life. It has become a popular commodity that is used mainly in electrical conductivity and construction for its excellent transferring characteristics. During the last century, the demand for high grade copper has risen twentyfold, because many countries use it as an indispensable component in building facilities. However, the trading of the copper future is mostly associated with hedging the spot price risk and employing the copper future contracts as an investment method. The price of copper, to some extent, directly reflects the state of the economy. Copper futures are usually used as an accurate measurement of economic growth. Increase or reduction in the demand for copper implies an economic...
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