Basket payment combined with Markowitz portfolio applied to commodity trade

Abstract

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.