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Principles of Financial Engineering, 3rd Edition by Salih N. Neftci, Robert Kosowski

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Chapter 7

Cash Flow Engineering and Alternative Classes (Commodities and Hedge Funds)

In this chapter, we discuss two main topics. The first is an application of cash flow engineering to alternative asset classes such as commodities. This allows us to further broaden our understanding of forward and futures markets to include concepts such as convenience yield, backwardation, and contango. Storage costs of commodities are a real-world complication that needs to be taken into account in commodities cash flow engineering. Following the discussion of commodity futures pricing and replication of commodity futures, we apply the swap engineering methodology that we developed earlier to price and replicate commodity swaps. Hedge funds are one of the ...

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