Author: Ying WangPublisher:
ISBN:
Category :
Languages : en
Pages : 118
Book Description
Funding risk, which caused the $1.3 billion derivatives-related loss at MG Refining & Marketing, Inc. in 1993, has long been overlooked in the risk management literature. The key to understanding funding risk is that, as futures hedging practice requires substantial infusions of cash to meet variation margin calls, the maximum margin required may occur well before the expiration of the futures contract, but must be met in order to maintain the futures positions. This paper approaches the question of how to properly measure the "funding risk" of commodity futures positions by estimating a CD-Vine copula model for the dependence of corn, soybean and wheat futures at multiple forecast intervals, using Harrison’s method and the Extreme Value Theory to calibrate the distribution of the maximum. This is the first attempt in the literature to model the extreme prices of futures contracts over a given time period in an agricultural commodity portfolio context. The adoption of the recently-developed CD-Vine copula model allows one to model the dependence structure in a more flexible manner than the previous standard multivariate models based on Gaussian or Student’s t distributions.
