ICM265-Commodity Derivatives

Module Provider: ICMA Centre
Number of credits: 10 [5 ECTS credits]
Terms in which taught: Spring term module
Non-modular pre-requisites:
Modules excluded:
Current from: 2018/9

Module Convenor: Mr Lee Burrows

Email: lee.burrows@reading.ac.uk

Type of module:


Summary module description:

This module provides an interesting insight into the commodity derivatives markets. It examines the aspects of pricing and trading physical derivatives, with emphasis on the energy and shipping (freight) sectors. The course is designed using real-life trading examples, stimulating students, who wish to follow a sales and trading career, to approach derivatives pricing from first principles.


The module aims to:

- Introduce the unique characteristics of commodities 

- Help students understand pricing of commodity forwards and options from first principles

- Present the processes of selling, trading, clearing and hedging commodity derivatives positions 

- Introduce a variety of commodity option trading strategies and their Greek sensitivities

- Help students understand the challenges of being a commodity derivatives market maker

Assessable learning outcomes:

By the end of the module, it is expected that students will be able to:  

- Describe the main features and mechanisms of commodity markets 

- Understand the differences between pricing financial and physical derivatives 

- Use arbitrage principles as the main intuition to price commodity futures and options  

- Evaluate the payoff profiles of all main commodity option strategies  

- Understand the mechanisms of the oil industry and stages of the oil supply chain 

- Critically evaluate the most up to date energy derivatives reports  

- Access the latest market information to create hedging strategies using commodity derivatives 

- Describe the mechanisms of the freight derivatives market and key characteristics of FFAs (Forward Freight Agreements) 

Additional outcomes:
The module encourages students to revisit the concepts of macroeconomic theory and understand the importance of the physical markets when pricing commodity derivatives.

Outline content:

Topic 1: Introduction to Commodity Market Mechanisms  

Topic 2: Pricing Commodity Forwards  

Topic 3: Pricing Commodity Options  

Topic 4: Basic Option Strategies 

Topic 5: Crude Oil. Market Fundamentals. Refining. Crude Products. 

Topic 6: Natural Gas. Coal.  

Topic 7: Precious Metals. Base Metals. Soft Commodities. 

Topic 8: The Shipping Market 

Topic 9: The Mechanisms of Forward Freight Agreements (FFAs) 

Topic 10: Managing and Hedging Commodity Derivatives Strategies

Brief description of teaching and learning methods:
Core lectures supported by classroom based tutor led discussion. Numerical exercises will require advanced use of Excel spreadsheets, as well as Bloomberg and Reuters applications.

Contact hours:
  Autumn Spring Summer
Lectures 10
Seminars 6
Guided independent study 84
Total hours by term 100.00
Total hours for module 100.00

Summative Assessment Methods:
Method Percentage
Written exam 70
Class test administered by School 30

Summative assessment- Examinations:

One 1.5-hour written examination (70% of final mark)

Summative assessment- Coursework and in-class tests:

One 1-hour Multiple-choice Test (30% of final mark)

Formative assessment methods:

Penalties for late submission:
Penalties for late submission on this module are in accordance with the University policy. Please refer to page 5 of the Postgraduate Guide to Assessment for further information: http://www.reading.ac.uk/internal/exams/student/exa-guidePG.aspx

Assessment requirements for a pass:
A minimum mark of 50%

Reassessment arrangements:

Re-assessment in August by written examination

Additional Costs (specified where applicable):
1) Required text books: i) Commodity Derivatives: Markets and Applications, Neil C. Schofield, Wiley Finance £63.00, ISBN: 978-0470019108
ii) Option, Futures and Other Derivatives, John C. Hull, Pearson, 2011, ISBN: 978-0273759072, £67.00.
2) Specialist equipment or materials:
3) Specialist clothing, footwear or headgear:
4) Printing and binding:
5) Computers and devices with a particular specification:
6) Travel, accommodation and subsistence:

Last updated: 9 November 2018


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