JYSKE MARKETS
Research, Jyske Markets, Jyske Bank A/S
Jan Bylov | Vice President | Strategist, FX, Rates & Oil
+45 89 89 71 68 | [email protected]
This presentation is general information and not personal advice
The Real World of Commodity Markets… a galaxy far, far away from the classroom
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Agenda
• The Salmon Case & risk hedging
• The Real World of Commodity Markets
• In the line of fire everything changes
• What’s wrong between school and the real world
• Anything, that works better ?
• How do I survive in the line of fire
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The Real World of Commodity Markets… a galaxy far, far away from the classroom
JYSKE MARKETS
Last time we met at Fish Pool…
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Recent years, rather the opposite mood, but now ?
Fundamental regime 1 (NOK 18-45)
Fundamental regime 2
(NOK 45-80)
Fundamental
transition
2011 Christmas Gift
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High commodity prices are always followed by increased supplyThis is the workings of the real world
Fundamental regime 2
(NOK 45-80)
Ultimately, production prices
determine the lower price range…
Ask your self. Is
NOK 45 far above
production price?
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0
10
20
30
40
50
60
70
80
90
100
-80 -70 -60 -50 -40 -30 -20 -10 0 10 20 30 40 50 60 70 80
Hed
ge r
atio
(%
)
Deviation from Fair Value (avg. production price), (%)
Upstream
Commercial hedging of salmon price risksProfit margin must compensate commodity price volatility
Note: neutral hedge ratio 44 % (volatility 80 % & profit 45 %) and 94 % (volatility 80 % & profit 5 %)
Neutral hedge ratio 44 %
(volatility 80 % & profit 45 %)
0
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20
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60
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80
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100
-80 -70 -60 -50 -40 -30 -20 -10 0 10 20 30 40 50 60 70 80
Hed
ge r
atio
(%
)
Deviation from Fair Value (avg. production price), (%)
Upstream Downstream
Neutral hedge ratio 94 %
(volatility 80 % & profit 5 %)
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The Real World of Commodity Markets
In school, what did they teach you and I about financial & commodity markets?
• Spread your risk (Modern Portfolio Theory)
• Asset valuation (Capital Asset Pricing Theory)
• Humans make rational choices (Efficient Market Hypothesis)
Theories, that tell you how to invest
• However, the real world doesn’t follow theories
• In The Line of Fire Everything Changes
The Commodity Markets are a galaxy far, far away from the classroom
In The Line of Fire Everything Changes
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Have you heard of or lived through…
The Financial Crisis ?• Around year 2008
The tech bubble ?• Around year 1999
Black Monday ?• On 19 October 1987
The Stock Market Crash ?• Around year 1929
The South Sea Company ?• Around year 1720
The Dutch Tulip Bubble• Around year 1637
…and many more
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What’s wrong between school and the real world
Financial bubbles occur far too often compared to theory
The challenge is within ourselves:
• We believe that we can calculate the answer
• We believe that we make rational decisions
We have forgotten, that it’s all about humans – not models
How our decisions are shaped within our brains:
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Anything, that works better ?
• All theories and models are simplifications of reality
• Never believe someone who claims to know tomorrow
• If you get too convinced about just one possible future you are at risk of losing big money
• Therefore…• Keep Your Eyes Wide Open, always
• Take the best of all theories
• Be flexible and proactive
• Denial will cost you dearly
• Only reality beats imagination
Denial of what is rational
is widespread through history
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How do I survive in the line of fire ?
• Reality is about
• YOUR judgement of how…
• YOU optimise…
• YOUR profit potential…
• relative to YOUR risk of loss
• You must learn the mechanics that motivate human decision making
• In my toolbox I include:
• Psychology
• Behavioural decision making theory
• Game theory
• War strategy
• Neuroscience
• Pattern recognition
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Be proactive and take control
of your financial risk
Thank you
Research, Jyske Markets, Jyske Bank A/S
Jan Bylov | Vice President | Strategist, FX, Rates & Oil
+45 89 89 71 68 | [email protected]
This presentation is general information and not personal advice
The Real World of Commodity Markets
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JYSKE MARKETS
Presentation of Jan BylovFX, Rates & Oil Strategist
Experience• +30 years with trading, wealth management, risk advisory and financial research
Theoretical background • Economics and two decades of studies in psychology, decision-making theory, game theory,
war strategy and behavioural pattern recognition
Managing• Tactical asset allocation overlay, short term equity trading & leveraged FX accounts
• Currently, research, forecasting and strategy on FX, rates, Brent oil and tactical asset
allocation strategy
Recognition• Internationally recognised seminars on Trading Financial Markets based on published
research papers
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Disclaimer & DisclosureImportant Investor Information (Disclaimer & Disclosure)
Jyske Bank is supervised by the Danish Financial Supervisory Authority.
The research report is based on information which Jyske Bank finds reliable, but Jyske Bank does not assume any responsibility for the
correctness of the material nor any liability for transactions made on the basis of the information or the estimates of the report. The
estimates and recommendations of the research report may be changed without notice. The research report is for the personal use of Jyske
Bank's clients and may not be copied.
This report is an investment research report.
Conflicts of interest
Jyske Bank has prepared procedures to prevent and preclude conflicts of interest thus ensuring that research reports are being prepared in
an objective manner. These procedures have been incorporated in the business procedures covering the research activities of Jyske Markets,
a business unit of Jyske Bank.
Jyske Bank's analysts may not hold positions in the instruments for which they prepare research reports. If an analyst takes over for the
responsible analyst in connection with illness, business activities, etc., this analyst cannot trade in the relevant instrument on the day of
publication of the research report and the following day.
Jyske Bank may, however, hold positions, have interests in or business relations with the instruments/companies for which such reports are
prepared. Analysts receive no payment from persons interested in individual research reports.
Company research reports have not been presented to the company prior to their release.
Read more about Jyske Bank’s policy on conflicts of interest at http://jyskebank.com/m/en/products/investment
The first publication date of the research report
See the front page. All prices stated are the latest closing prices before the release of the report, unless otherwise stated.
Financial models
Jyske Bank employs one or more models based on traditional econometric and financial methods. The data used are solely data available to
the public.
Risk
Investment may be associated with risk, so assessments and recommendations, if any, in this research report may be associated with risk.
See the research report for an assessment of risk, if any. The risk factors stated and/or calculations of sensitivities in the research report are
not to be considered all-encompassing. If the instrument traded is in a currency other than the investor’s base currency, the investor accepts
an FX risk.
Recommendations
The future and historical returns estimated in the research report are stated as returns before costs and tax-related circumstances since
returns after costs and tax-related circumstances depend on a number of factors relating to individual client relations, custodian charges,
volume of trade as well as market-, currency- and product-specific factors. It is not certain that the instrument will yield the stated expected
future return/s. The stated expected future returns exclusively express our best assessment.
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