Customer Reviews

Commodities and Commodity Derivatives: Modelling and Pricing for Agriculturals, Metals and Energy

5 star:		(3)
4 star:		(2)
3 star:		(1)
2 star:		(2)
1 star:		(1)

 

 

As a former agricultural futures trader who has now moved on to credit, this book was a welcome addition to my bookshelf, as it brings a contemporary voice to the field which has been long overdue. The previous best work was the CBOT's own "Commodities Trading Manual," which has been outdated for a decade. Before the arrival of Helyette Geman's "Commodities and Commodity Derivatives : Modeling and Pricing for Agriculturals, Metals and Energy" the current state-of-the-art for pricing models and information feeds for commodity derivatives was sadly dispersed across journals, often obscure ones. Now increasing attention is being paid to diversified portfolios containing commodity exposure in addition to classic investment vehicles. Along with hedge funds, who naturally seek "under priced" volatility, portfolio managers today must therefore have a command of a wider knowledge base of investment opportunities. This work is therefore, indispensable.

The weakest element of the work is Nassim Taleb's introduction, for which commercial interests and pedagogic considerations no doubt combined.

Having done some work in commodities, and more recently in commodities derivatives, I was looking forward to reading this book. Helyette Geman has an excellent reputation in both the academic "ivory tower" and the practitioner "real world". While the book definitely attempts to cover a large and hereto unmet demand, it does not deliver a coherent, consistent and careful analysis of the commodities markets.

In offering an introductory overview of commodities spot and futures markets, the book does a decent job. Chapters 1 - 6 are probably the best chapters in the book and reflect the good understanding and thought leadership of the author. These chapters would have benefited from some careful linguistic editing. Frequently, the text reads French although the book is written in English; this linguistic dissonance is at times frustrating.

The last eight chapters are quite uneven. Each chapter is supposed to describe and introduce a commodity market, such as ags, metals, energy, etc, but few of the chapters are able to fully penetrate the material. The chapters and the material in these chapters are uneven, often bordering to the somewhat disorganized, and occasionally challenging to follow a logical flow in the exposition. Granted, the mathematics are there and they are correct for the most time (some steps in chapter 12 only make sense when you switch around the notation, which can be annoying). The chapter on gas markets is somewhat confusing and the treatment of electricity markets is very uneven. The two better chapters in the second half of the book - on metals and oil - are not written by prof Geman.

Is this a useful book? Notwithstanding the problems, it is a useful book as long as the reader and user recognizes its limitations.

As I had background in equity and credit derivatives I found the book to be an excellent introduction to commodities as it covers many aspects that I currently support at Barclays Capital as a technologist; the mathematical notations are not complicated and you can always dig deeper then the book. Definitly a book in your reference library.

[...]

Two aspects of Prof. Geman's book are immediately distinguishing: it is quantitative and it is not propaganda. You won't read about how you can make millions trading commodities NOW! in this book; you will read about some of the quirks of these markets and how those quirks an affects the modeling.

Equally important is that I found the book eminently readable. As one reviewer noted, there are occasionally clumsy phrases that read like transliterated French; however, I preferred Geman's chapters to those written by "guest authors." Overall, the tone and order of exposition are so engaging that I read the book completely (instead of skimming or reading only for needed information).

The only suggestion I would make is to also purchase Dunsby et al.'s book on commodities; the two are great complements.

The text contains a very readable and intuitive introduction to Brownian motion in the context of pricing commodity derivatives. (The exception is Ito's Lemma, which is simply dropped into the reader's lap without any background or any motivation; see Wiersma's book on Brownian motion for both.) Prof. Geman does an exemplary job of comparing and contrasting the foundations of option pricing for equity options versus commodity derivatives. The last part of the book is a very good (albeit now somewhat dated) introduction the major commodities markets (ag, metals, oil & gas, and electricity). Particularly useful are the explications of the idiosyncracies of each market and why option pricing techniques and instruments will or will not work. A reader with 2 semesters of calculus and a background in standard probability theory (discrete and continuous) should have no problem with the mathematical formalism of the first six chapters. Alternately, read Hull or Choudhry's encyclopedic tome on the bond and money markets for a solid foundation.

I was reading the 2nd chapter where the math appeared the first time in the book. On Page 37, the equation #'s are completely messed up! For example, on Page 37, the author is referring to Equation (2.6): Where the hell is Equation (2.6) up to this page?! Of course, I am smart enough to figure out that it's actually referring to Equation (2.5).

Another detail: on Page 28 (Section 2.2), the 2nd bullet point. Here is TWO original quotes from this page.
ONE: "The price of a commodity and its volatility are positively correlated..."

Two: "We will call the inverse leverage effect the negative relationship between commodity prices and their volatility."

So what's the relationship between commodity prices and their volatility? Acoording to ONE, they are POSITIVELY correlated; however, by TWO, they have a negative relationship.

Does it take TWO PhDs to make mistakes like those above? (I am wondering how did she do her PhDs. It would be fun to read her thesis)

There just aren't enough good books on commodities. This fills a gap but suffers from incompleteness. The overviews are good, but there should be more scope and depth. The modeling and pricing aspects are ok, but I expected more there too.

However, I am glad I have it. It is well written and contains a lot useful information. A good primer.

an incredible reach book on the theoretical framework of derivatives pricing on commmodities as well as many specific fundamental aspects of agricultural, metal and energy. a beautiful blend of technical and fundamental topics on commodities. experienced derivatives people who encounter commoditiy derivatives the first time will be excited reading even the fundamentals of commoditiy derivatives since those basics are exciting to read and rich in challenges not known in financial derivatives. no wonder Nassim Taleb wrote the foreword, this is one of the most exciting derivatives books available!

Mrs Geman is a refernce in the commodities world and I would have expected to see less talk and more models. I defnitely would not recommend this book to any quant who have to deal with the real world!