Bond Flotation with Exotic Commodity Collateral

50 Pages Posted: 13 Jun 2019

See all articles by M. A. H. Dempster

M. A. H. Dempster

University of Cambridge - Centre for Financial Research; Cambridge Systems Associates Limited; University of Cambridge - Judge Business School

Date Written: June 11, 2019

Abstract

Exotic high tech metals such as rare earth oxides, titanium and nickel wire are increasingly important to semi-conductor, aerospace and high end defence technology R & D and production. As a result – while not market traded and therefore sporadic order dependent and highly volatile – prices of these commodities have been rising on average over the past decade. The metals trading subsidiary of an international group acquired over 6 M metres of nickel wire which at the current market price of about 300 EUR per metre is worth over 1.6 B EUR. The firm wished to raise from 300 M to 1B EUR in the capital markets in order to purchase a variety of these high tech metals to take advantage over the medium term (5 to 10 years) of generally rising prices. After a brief description of the current state of the exotic high tech metalss markets, this paper treats the technical pricing and default risk analysis of an example 350 M EUR 7 year amortized corporate bond issue backed by a nickel wire inventory and subsequent high tech metal trading as collateral. Topics covered include security modelling with high tech metal collateral, the design of 100% risk free securities with third party derivatives and security pricing and trading methodology. The complex stochastic analysis and Monte Carlo simulation analysis presented is based in part on specially developed modelling of the nickel wire catalogue price and third party price projections for rare earth oxides and titanium. The analysis is based on 10 year (2008-2017) daily market data and supports an optimistic view in that after accounting for all ongoing costs we find a zero default probability for the bond issue – a situation seldom seen to accompany its stipulated 12% internal rate of return.

Keywords: risk free bond issuance, high tech metal collateral, nickel wire, rare earth oxides, titanium, option exchange, illiquid commodity market trading

JEL Classification: G13,C58

Suggested Citation

Dempster, M. A. H., Bond Flotation with Exotic Commodity Collateral (June 11, 2019). Available at SSRN: https://ssrn.com/abstract=3402742 or http://dx.doi.org/10.2139/ssrn.3402742

M. A. H. Dempster (Contact Author)

University of Cambridge - Centre for Financial Research ( email )

Centre for Mathematical Sciences
Wilberforce Road
Cambridge, CB3 0WA
United Kingdom

Cambridge Systems Associates Limited ( email )

5-7 Portugal Place
Cambridge, CB5 8AF
United Kingdom

University of Cambridge - Judge Business School ( email )

Trumpington Street
Cambridge, CB2 1AG
United Kingdom

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