APPENDIX

The London Metal Exchange

The London Metal Exchange, LME, hosts actively traded markets for six primary industrial metals: aluminum, copper, lead, nickel, tin, and zinc.a In this book, the discussion focuses on the three most liquid metals: aluminum, copper, and zinc.

LME OVERVIEW

The LME differs substantially from the other exchanges that have been discussed in this book, representing a hybrid between a futures market and a forward market. The unique characteristics of the LME derive from its historically strong orientation toward the physical side of the industry: Every contract is presumed capable of physical delivery. These commercial needs have resulted in more delivery dates and rather elaborate contract specifications as compared with the other exchanges.

A typical commodity futures market offers one expiry date (contract) per month, and it is up to the participants to hedge away basis risk between the desired delivery date and the limited set of expiry dates. Not so for the LME, where every market date is in principle a prompt date. Contract dates begin with cash, two market days from the current day, and extend outward daily for three months. The LME then offers contracts that settle every Wednesday for months 3 to 6 and then every third Wednesday for months 6 to 63.b

The most important and most liquid contract is the three-month. Typically prices of other contracts are quoted in dollars of backwardation or contango relative to the three-month. For instance, 6c ...

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