How does one go about measuring volatiliy in the commodity markets?
Which particular commodity are you looking at? For historical volatility I usually get the data from one of the data services my company has subscribed to, but you can find it on NYMEX/CBOT . For implied volatility you can you ATM options trading on NYMEX.
future volatility for a commodity that doesn’t exist yet- carbon credits
Use carbon credits markets which already exists as a base…(EUA in Europe…) - Can be a good starting point;
as above, I agree.
I am skeptical about the cap and trade legislation, and at present I hate anyone advocating that bill. Anyways, since there is no US market at present for the carbon credits, you can use EU data as a base for a stochastic model or you can do it the simple and tedious way. Firstly you need to know which side you belong to, the one who will be selling carbon credits or the one purchasing them (like pure refinery companies).Secondly you would want to estimate the emission levels-- that data is easily available. Depending upon the forward estimates(curves) of emissions and assuming a range of price for carbon credits you can estimate the cost and hedge accordingly.