Investing technical analysis in coppermine
The position could be closed before expiration or rolled over to a new contract. Similar to other commodity futures, investors rarely intend on taking ownership of the asset itself. Warning: Although copper is a widely used metal, it is not necessarily a suitable investment for all investors' portfolios.
For example, the price of copper can be influenced by multiple factors, including the health of global economies, and supply and demand for industrial use. Thus, the price of copper is not predictable, especially in the short term. The type of investors that typically gain exposure to copper through futures and options are those who are willing to take on the added risk of short-term price fluctuation.
Some investors use copper and other commodities for diversification and hedging strategies. Investing In Copper Indirectly Copper miner stocks: If an investor wanted to add exposure to copper as an equity investment, they could choose to buy stocks of copper mining companies.
Different copper ETFs may hold copper bullion, copper futures, or stocks of copper mining companies. Some may also be leveraged. Copper mutual funds: Investors can gain indirect exposure to copper by purchasing shares of a mutual fund that holds stocks of companies associated with the mining of copper. Some broad basket commodity mutual funds and natural resources mutual funds include copper miners in their holdings.
Options : Purchasing an option provides the owner with the right, but not the obligation, to buy call option or sell put option an asset that is linked to copper, such as a stock or ETF. Tip: Indirect investments in copper may have wildly varying degrees of exposure to the metal and different degrees of leverage and risk from other assets. Investors should be sure to understand the nature of the assets in any copper investment and their expected relationship to the metal itself.
Hedge against inflation : Since copper is a widely used industrial metal, its increased demand during economic expansion makes copper investments a potential hedge against inflation or other broad economic factors. Cons of Investing In Copper Economic sensitivity: As an industrial metal, demand for copper can fall significantly during periods of economic weakness. Limited exposure: Investing in mutual funds or ETFs may provide only limited exposure to copper in a broader portfolio of other holdings.
Some ETFs may also contain derivatives and may be leveraged. Market risk: Like other commodities, the price of copper can see wide fluctuations in the short term. Trading copper futures contracts may result in losses that are greater than the amount deposited with a broker. As can be seen, the real options considered add substantial value to this natural resource investment. For all copper prices under consideration, abandoning the mine was found to be more valuable than mothballing, and switching more valuable than abandoning.
Importantly, the option to switch, which in itself is a portfolio of options containing the other two options, will always be at least as valuable than its constituent options. As expected, the values of these options decrease as the operating margin increases since operational flexibility becomes less attractive. Columns a - a-ii and a - a-i of the table give the value of the option to mothball and to abandon the mine, respectively, within the portfolio of options.
In other words, these columns report how much an individual real option adds to the portfolio assuming that the other individual option is already contained in the portfolio. To determine the value of one option, the value of the mine with the options portfolio was measured against the value of the mine with the other option.
For example, the difference between column a and a-ii results in the values shown in column a - a-ii. This result is very intuitive given the above presented valuation of the options to mothball and abandon in isolation. This indicates that adding strategic flexibility to limit downside risk by abandoning the mine early to the mine that already has operational flexibility to exploit upside risk by deviating from the immediate extraction of copper is more valuable in this portfolio context than the other way around.
Although Brennan and Schwartz were able to provide several insights into the valuation of this small options portfolio, there are some technical issues in their analysis that impacted on the reliability of some of their results. Table 4 reports the results of their numerical analysis. The difference between column 4 and the greater of the values shown in columns 2 and 3 represents the value of the option to close down or abandon the mine if the price of copper falls far enough.
The value of this closure option is shown in column 5. Brennan and Schwartz However, while the values reported in columns 2 and 3 have been widely confirmed in the literature including this work see Table 2 , both the definitions of the values and the actual values shown in columns 4 and 5 are flawed. Our results are in line with Cortazar et al. The detailed portfolio analysis presented here gives insights into why the fixed-output-rate mine might have been overvalued in the analysis of Brennan and Schwartz Comparing these values in column 4 of Table 4 with our results in Table 3 shows that there is a similarity between their values and the values we have obtained for the mine with the option to abandon—see column a-ii.
This similarity suggests that their fixed-output-rate mine actually includes the option to abandon. Even though our results tend to be slightly low-biased in relation to theirs, particularly for low copper prices, the overall patterns are very similar.
Surprisingly, our hypothesis that the fixed-output-rate mine of Brennan and Schwartz includes the abandonment option even seems to be confirmed by the authors themselves, who stated in their paper, two paragraphs below the one we cited above, that: Ownership of a mine [ In the earlier statement, Brennan and Schwartz define close down or abandon the mine as representing the closure option.
Instead, their closure option corresponds to an option that looks like our option to temporarily mothball the mine. Using IDs to graphically illustrate this inconsistency, for the fixed-output-rate mine, it appears that Brennan and Schwartz have considered the case that corresponds with the ID of Fig.
Secondly, the definition of the closure option in Brennan and Schwartz is inconsistent, and this leads to an incorrect valuation. The data thus obtained is therefore irrelevant regardless of the benchmark applied, that is whether the real value of the fixed-output-rate mine Fig. Our analysis—the relevant values are given by column a - a-ii of Table 3 —seems to confirm this when taking into account the above mentioned bias and inconsistency.
Natural resource investments: two- and three-factor model extensions In this section we extend the mine example by integrating the two- and three-factor model of Gibson and Schwartz and Schwartz , respectively. Problem setting While the original copper mine example of Brennan and Schwartz contained a portfolio of interdependent real options, it only treated the commodity spot price, i.
Here we extend their example by additionally considering both the instantaneous convenience yield and the instantaneous interest rate to be stochastic. As such, in terms of options portfolio considered this setting is the same as the one described in Sect. In terms of uncertainties considered, however, we replace the one-factor setting of Brennan and Schwartz by the three-factor model of Schwartz , which nests the two-factor model of Gibson and Schwartz As in Tsekrekos et al.
Note that the two-factor model copper price and convenience yield are stochastic of Gibson and Schwartz is obtained by making the interest rate constant, i. Modelling The modelling of this investment problem is to a large extent identical to the modelling presented in Sect. In recent years, this relationship between option value and underlying uncertainty has received increasing interest by academics, e. Existing works have studied the investment-uncertainty relationship from a range of perspectives, that is considering different interpretations of this relationship such as the impact of uncertainty on the optimal investment trigger, or the probability that investment will take place in a certain time interval.
In this work, we interpret the investment-uncertainty relationship as the effect of overall or total volatility on the value of the investment with the portfolio of real options. The mine values from Brennan and Schwartz are therefore used as benchmark in our equivalence analysis. Table 5 Parameters of convenience yield process for different specifications of Tsekrekos et al. For the sake of our numerical analysis, yet without loss of generality, we focus on the three combinations of parameters of the convenience yield process shown in Table 5.
These three specifications correspond with the 1st, 11th, and 21st specification of Tables 3 , 4 , 5 and 6 of Tsekrekos et al. This choice is sufficient for our analysis, more specifically, for studying the effects of different parameters of the two models on the investment value. Also, as Tsekrekos et al. Figure 6 gives an illustration of sample paths. In addition, Table 6 reports the corresponding results of Tsekrekos et al.
Comparing their results with ours shows that results are noticeably different. Tsekrekos et al. This is, however, in contrast to what has been found by Tsekrekos et al. This is consistent with the results reported in Fig. The results are shown by Table 7 and are also included in Fig. However, it is misleading to suggest that this is always the case.
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Compare Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace. Related Terms. Double Top and Bottom Definition Double tops and bottom are technical chart patterns that indicate reversals based on an "M" or "W" shape. Triple Bottom A triple bottom is a bullish chart pattern used in technical analysis that is characterized by three equal lows followed by a breakout above resistance.
What Is a Morning Star? A morning star is a bullish candlestick pattern in a price chart. It consists of three candles and is generally seen as a sign of a potential recovery following a downtrend. What Is an Uptrend? Uptrend is a term used to describe an overall upward trajectory in price.
Many traders opt to trade during uptrends with specific trending strategies. What Is a Cup and Handle Pattern? A cup and handle is a bullish technical price pattern that appears in the shape of a handled cup on a price chart. Fundamental analysis is a method of evaluating securities by attempting to measure the intrinsic value of a stock. Fundamental analysts study everything from the overall economy and industry conditions to the financial condition and management of companies.
Earnings , expenses , assets, and liabilities are all important characteristics to fundamental analysts. Technical analysis differs from fundamental analysis in that the stock's price and volume are the only inputs. The core assumption is that all known fundamentals are factored into price; thus, there is no need to pay close attention to them.
Technical analysts do not attempt to measure a security's intrinsic value, but instead, use stock charts to identify patterns and trends that suggest what a stock will do in the future. Limitations of Technical Analysis Some analysts and academic researchers expect that the EMH demonstrates why they shouldn't expect any actionable information to be contained in historical pric e and volume data; however, by the same reasoning, neither should business fundamentals provide any actionable information.
These points of view are known as the weak form and semi-strong form of the EMH. Another criticism of technical analysis is that history does not repeat itself exactly, so price pattern study is of dubious importance and can be ignored. Prices seem to be better modeled by assuming a random walk.
A third criticism of technical analysis is that it works in some cases but only because it constitutes a self-fulfilling prophecy. For example, many technical traders will place a stop-loss order below the day moving average of a certain company. If a large number of traders have done so and the stock reaches this price, there will be a large number of sell orders, which will push the stock down, confirming the movement traders anticipated.
Then, other traders will see the price decrease and also sell their positions, reinforcing the strength of the trend. This short-term selling pressure can be considered self-fulfilling, but it will have little bearing on where the asset's price will be weeks or months from now.
In sum, if enough people use the same signals, they could cause the movement foretold by the signal, but over the long run, this sole group of traders cannot drive the price. Chartered Market Technician CMT Among professional analysts, the CMT Association supports the largest collection of chartered or certified analysts using technical analysis professionally around the world. The association's Chartered Market Technician CMT designation can be obtained after three levels of exams that cover both a broad and deep look at technical analysis tools.
This demonstrates how well the two disciplines reinforce each other. Professional technical analysts typically accept three general assumptions for the discipline. The first is that, similar to the efficient market hypothesis, the market discounts everything. Second, they expect that prices, even in random market movements, will exhibit trends regardless of the time frame being observed. Finally, they believe that history tends to repeat itself.
The core assumption of technical analysis, on the other hand, is that all known fundamentals are factored into price; thus, there is no need to pay close attention to them. Technical analysts do not attempt to measure a security's intrinsic value, but instead, use stock charts to identify patterns and trends that might suggest what the security will do in the future.
There are a variety of ways to learn technical analysis. The first step is to learn the basics of investing, stocks, markets, and financials.
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