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I am trying to model forward curve for palladium in isolated market environment (entering contracts in other markets is close to impossible / costs too much), where no derrivatives on palladium are traded.

My intuition tells me that one can somehow model palladium prices from other precious metals (gold derivatives are traded here), but i cant think of a way how to do this.

Is there any existing practice for such a problem?

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  • $\begingroup$ Can you please give add'l details: are the forwards for physical delivery or non-delivery? If non-delivery, do they reference the same benchmarks as the exchange-traded futures? If not, how fungible are the underlyings, compared eg to West Texas vs Brent? $\endgroup$ Commented Jun 17 at 12:49
  • $\begingroup$ Sry for late reply. To add some context, i am trying to price debt product that pays x% in local currency with Notional indexed by spot palladium price (aka gold bonds). To build a DCF i need palladium forward prices (hence NDFs), that i dont observe on my market. The only precious metal with observable prices is Gold (via gold futures). Market is isolated so local futures quotes for the same maturity differ from ones i see in i.e. Reuters (even though they reference same LBMA benchmark). $\endgroup$ Commented Jun 30 at 14:55
  • $\begingroup$ Regarding fungability of assets could u please elaborate a bit? In contract there is no reference to gold $\endgroup$ Commented Jun 30 at 14:56
  • $\begingroup$ A long time ago I worked on a credit-linked "commodity extinguisher" product, which would 1) knock out ("extinguish" without recovery, or "appear") on a credit event (just like a CDS), and 2) without a credit event, would pay depending on (non-delivery) commodities. For your bonds, you don't need the complicated relationship between some 3rd party credit and the commodities, we also still needed the forward curves for the commodities. Inter alia, we priced 5 precious metals: (all non-delivery) gold, silver, platinum, palladium, rhodium. Our intent was not to have material market risk to the $\endgroup$ Commented Jun 30 at 17:34
  • $\begingroup$ to the commodities, so we would frequently rehedge with (not credit linked) commodity forwards, whose notional would be the credit-risky notional $\times$ physical survival probability of the credit, frequently re-estimated. We took the approach of just taking the commodity curves from the commodity market making desks that we would face for the hedges. You'd still need some independent price verification, but it doesn't need to match exactly your market maker, and should be close enough. For pricing this, it matters less what a "fair" curve might be, but rather what it'll cost you to hedge. $\endgroup$ Commented Jun 30 at 17:42

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