Basket payment combined with markowitz portfolio applied to commodity trade

AGH University of Science and Technology
AGH University of Science and Technology
AGH University of Science and Technology
Lviv Politechnic National University

The article presents a method for expressing the value of commodities on world markets (petroleum products) as a function of a basket of currencies or a basket of precious metals (Gold and Silver) and compares their performance with a Markowitz portfolio of the underlying. The method of basket payments can be used as a tool for diminishing the riskiness of forward transactions on commodities markets. By establishing a model of payment based on the baskets, we propose to liberate the payment rules from disadvantages inherent in the use of official currencies. After minimizing the price variability of individual commodities by using instrumental (basket) prices, we propose to construct Markowitz portfolios of the commodities to reach further reduction of the forward transactions riskiness. Results of applying of the idea to selected petroleum products are shown.

1.    Baxter, M., Business cycles, stylized facts, and the exchange rate regime: Evidence from the United States. Rochester Center for Economic Research Working Paper, No. 169, 1988.
2.    Baxter, M., Stockman A.C., Business cycles and the exchange-rate regime: some international evidence, Journal of Monetary Economics, 23, 1989.
3.    Branson W.H., Katseli L.T., 1981 Currency baskets and real effective exchange rates, NBER working paper N. 666.
4.    Duda J.T., Augustynek A., Cyclic properties and predictivity of LME prices of selected metals in one month to one-year horizon, wyd. ATH, Bielsko-Biała, 2008. 
5.    Duda J.T., Augustynek A., Periodicity of Selected Metals  Prices  in  London  Metal  Exchange  in  the Light of 2008 World Economy Crisis, wyd. ATH, Bielsko-Biała, 2009.
6.    Duda J.T., FUKSA M., Augustynek A.: Basket payment methods for metal commodities  Zarząd-zanie produkcją – planowanie, wytwarzanie, optymalizacja i kontrola, wyd. ATH, Bielsko-Biała, 2010.
7.    Heller, H.R., 1978, Determinants of exchange rate practices, Journal of Money Credit and Banking, 
V. 10, N. 3, August, 1978.
8.    Kawai, M., 2002, Exchange Rate Arrangements in East Asia: Lessons from 1997-1998 Currency Crisis, Monetary and Economic Studies (Special Edition), December, 2002.
9.    Markowitz, H.M. (1959). Portfolio Selection: Efficient Diversification of Investments. New York: John Wiley & Sons.
10.    Mundell, R., 1961. A theory of optimum currency areas. Papers and Proceedings of the American Economic Association 51, 657–664.
11.    Ogawa, E., Shimizu, J. 2006. Progress towards a common currency basket system in East Asia, RIETI Discussion Paper Series 07-E-002.
12.    WWW Data sources,,,,,,