Commodity market flexibility and financial derivatives

Jostein Tvedt

Journal of Commodity Markets, 2020, vol. 18, issue C

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.

Keywords: Dynamic equilibrium asset pricing; Mean reverting commodity prices; Value of flexibility (search for similar items in EconPapers)
JEL-codes: G12 Q41 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jocoma:v:18:y:2020:i:c:s2405851319300595

DOI: 10.1016/j.jcomm.2019.100094

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