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Commodity market flexibility and financial derivatives

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  • Tvedt, Jostein

Abstract

This paper discusses the link between commodity market flexibility and financial derivatives. Real flexibility affects financial assets, directly, via the representative agent's ability to use real flexibility as substitute to holding financial options and, indirectly, via the aggregate effect of real flexibility on the dynamics of underlying commodity prices. Real flexibility is modelled as instantaneous adjustment of production in response to demand-driven changes in commodity prices and by gradual entry or exit of production units. Increased real flexibility typically reduces the market price of financial flexibility. The paper includes a short empirical section on oil and gas markets.

Suggested Citation

  • Tvedt, Jostein, 2020. "Commodity market flexibility and financial derivatives," Journal of Commodity Markets, Elsevier, vol. 18(C).
    • Handle: RePEc:eee:jocoma:v:18:y:2020:i:c:s2405851319300595
    DOI: 10.1016/j.jcomm.2019.100094
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    References listed on IDEAS

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    More about this item

    Keywords

    Dynamic equilibrium asset pricing; Mean reverting commodity prices; Value of flexibility;
    All these keywords.

    JEL classification:

    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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