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GBO
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Joined: January 31st, 2006, 2:10 pm

About the oil term structure.

January 23rd, 2009, 12:39 pm

Hello,I am currently in deal with products based on WTI options. Since I am use working with equity modelisation I fell quite unconfortable with the WTI term strucure modelisation. Little help from brillant brains like most of you are would be very precious.First I would like to know if the Dec10 forward of the CL1 (first to deliver contract) is directly the current level of the Dec10 contract, or if I need a model to calculate it?Then, can I say that a ATM Call maturity dec10 based on the Dec10 contract is the same product than a Call on the CL1 with the same maturity and the strike at the current level of the Dec10 contract?And last but not least, Is it correct to say that indexes calculeted as a rolling CL1 corrected of the rolling cost/gain by under/over weignting the level of the contract, have their forward level independant form the WTI term structure.Here it is,Thanks a lot in advance!
 
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GBO
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Joined: January 31st, 2006, 2:10 pm

About the oil term structure.

January 24th, 2009, 1:15 pm

Very interesting questions, I am sure it deseverses some answers.@+
 
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gjlipman
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Joined: May 20th, 2002, 9:13 pm

About the oil term structure.

January 25th, 2009, 11:49 am

Sorry - I am struggling to understand your questions, and don't have time to write 20 answers to questions that might be what you are really trying to ask. Try asking your questions a bit more clearly, and I'll try and answer them.
 
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GBO
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Joined: January 31st, 2006, 2:10 pm

About the oil term structure.

January 26th, 2009, 7:48 am

Sorry I wasn't clear.My 1st question was : if CL1 is the font month to deliever WTI contract and CL10 the tenth to deliever,What is today the 10 months forward level of the CL1?Is it the CL10 today, or do I need a model or a formula to calculate it?Hope it will be better, thks
 
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daveangel
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About the oil term structure.

January 26th, 2009, 8:00 am

CL10
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GBO
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Joined: January 31st, 2006, 2:10 pm

About the oil term structure.

January 26th, 2009, 1:56 pm

Thank you Mr daveangel,So I will be more precise on my second question wich is : If the WTI December 2009 Contract (CLZ9) last trade date is 20-nov-2009.Is it true that the 2 following options are the same product?Products : Call, Maturity : 20-nov-2009 , Strike : CLZ9 level of todayUnderlying 1 : CLZ9 Underlying 2 : rolling CL1 (when the 1st contract to deliever change of maturity the CL1 does too)Here it is, still hopping it's better now.
 
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daveangel
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Joined: October 20th, 2003, 4:05 pm

About the oil term structure.

January 26th, 2009, 2:00 pm

Please clarify what you mean by:Underlying 2 : rolling CL1 (when the 1st contract to deliever change of maturity the CL1 does too)Does your option settle into a futures contract ?
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GBO
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Joined: January 31st, 2006, 2:10 pm

About the oil term structure.

January 26th, 2009, 2:55 pm

Rolling CL1 : Until the maturity of the option, the underlying is always the first contract to deliever of the WTI.In february the underlying is the March contract (CLH9), then in march it is the April contract (CLJ9), ..., in november it is CLZ9.The underlying moves are of 2 kinds : the day-to-day moves of the contract and once a month the rolling cost (or gain).
 
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daveangel
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About the oil term structure.

January 26th, 2009, 3:05 pm

I am assuming that they american style options - in which case they are not the same .
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GBO
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Joined: January 31st, 2006, 2:10 pm

About the oil term structure.

January 26th, 2009, 3:10 pm

My mistake I am talking of european exercice style option.
 
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daveangel
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About the oil term structure.

January 26th, 2009, 3:14 pm

in which case the delivery contract is the same ... so there is no difference. In that case I think your question is whether you edge with CL10 or hedge using CL1 and roll every month. If you do the latter you are taking a punt on the basis which might well be profitable.
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GBO
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Posts: 30
Joined: January 31st, 2006, 2:10 pm

About the oil term structure.

January 26th, 2009, 4:30 pm

A final precision to be crystal clear,Concerning the first point : i.e. the 10 months forward level of the CL1 is the CL10 (actually CL11) is a model free afirmation, whereas to hedge my Call on the rolling CL1 with the December contract I think I need a model to express the moves of the CL1 in term of moves of the December contract.That's all folks for me.Thank you for your help and time.
 
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CommOddity
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Joined: July 25th, 2007, 8:22 am

About the oil term structure.

January 27th, 2009, 9:11 am

Quotewhereas to hedge my Call on the rolling CL1 with the December contract I think I need a model to express the moves of the CL1 in term of moves of the December contract.That's all folks for me.Thank you for your help and time.What you're doing here it's a proxy hedge. The simplest model (and IMHO the best to implement and control) is to perform a regression analysis and get an optimal hedge ratio. All this things are in early chapters of Hull.An additional suggestion: why hedge on CL1? You get exposed to 10 roll-over basis risks....you can hedge directly on CL10 since on WTI it's failry liquid.
 
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GBO
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Joined: January 31st, 2006, 2:10 pm

About the oil term structure.

January 27th, 2009, 12:17 pm

Ok understood,But imagine I sell a product on the Wheat, thanks to you I can made my proxy hedge on the dec9 contract!Plenty of joy on the desk.Thanks for the suggestion!
 
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daveangel
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Joined: October 20th, 2003, 4:05 pm

About the oil term structure.

January 27th, 2009, 12:23 pm

QuoteOriginally posted by: GBOOk understood,But imagine I sell a product on the Wheat, thanks to you I can made my proxy hedge on the dec9 contract!Plenty of joy on the desk.Thanks for the suggestion!if you chose to hedge with a near dated futures you are taking basis risk as I have said before. The nth future is relatied to front month as followsFn = F0 + cost of rollif you have a cahs and carry arb book and it makes sense for you to do so, then you can trade forwards to the maturity you want in your options book with the arb book. the basis risk will then be in the arb book.
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