A freight forwarder with a fleet of bulk carriers wants to optimize their portfolio in the metals markets with

entry into the nickel business and use of the tramp trade. Tramp ships are the company's "swing" option

without any fixed charter or other constraint. They allow the company flexibility in managing several aspects

of freight uncertainty. They have allocated $250 million to purchase metals. The company wants us to:

1. Retrieve and begin to analyze data about potential commodities to diversify into

2. Compare potential commodities with existing commodities in conventional metals spot markets

3. Begin to generate economic scenarios based on events that may, or may not, materialize in the

commodities

4. The company wants to mitigate their risk by diversifying their cargo loads

Identify the optimal combination of Nickel, Copper, and Aluminium to trade

1. Product: Metals commodities and freight charters

2. Metal, Company, and Geography:

a. Nickel: MMC Norilisk, Russia

b. Copper: Codelco, Chile and MMC Norilisk, Russia

c. Aluminium: Vale, Brasil and Rio Tinto Alcan, Australia

3. Customers: Ship Owners, manufacturers, traders

4. All metals traded on the London Metal Exchange

Key business questions

1. How would the performance of these commodities affect the size and timing of shipping arrangements?

2. How would the value of new shipping arrangements affect the value of our business with our current

customers?

3. How would we manage the allocation of existing resources given we have just landed in this new market?

### Getting to a reponse: more detailed questions

4. What is the decision the freight-forwarder must make? List key business questions and data needed to

help answer these questions and support the freight-forwarder's decision.

5. Develop the stylized facts of the markets the freight-forwarder faces. Include level, returns, size times

series plots. Calculate and display in a table the summary statistics, including quantiles, of each of

these series. Use autocorrelation, partial autocorrelation, and cross correlation functions to understand

some of the persistence of returns including leverage and volatility clustering effects. Use quantile

regressions to develop the distribution of sensitivity of each market to spill-over effects from other

markets. Interpret these stylized "facts" in terms of the business decision the freight-forwarder makes.

6. How much capital would the freight-forwarder need? Determine various measures of risk in the tail

of each metal's distribution. Then figure out a loss function to develop the portfolio of risk, and the

determination of risk capital the freight-forwarder might need. Confidence intervals might be used tofa risk management plan with varying tail experience thresholds.