Showing papers on "Spot contract published in 1977"
TL;DR: In this article, the authors derived a general form of the term structure of interest rates and showed that the expected rate of return on any bond in excess of the spot rate is proportional to its standard deviation.
Abstract: The paper derives a general form of the term structure of interest rates. The following assumptions are made: (A1) The instantaneous (spot) interest rate follows a diffusion process; (A2) the price of a discount bond depends only on the spot rate over its term; and (A3) the market is efficient. Under these assumptions, it is shown by means of an arbitrage argument that the expected rate of return on any bond in excess of the spot rate is proportional to its standard deviation.
408 citations
TL;DR: In this article, the role of futures markets as a place where information is exchanged and where people who collect and analyse information about future states of the world can earn a return on their investment in information gathering is explained.
Abstract: It is a fact that futures markets exist in some commodities and not others. Similarly, contingent commodity contracts of the type described by Debreu do not exist for all commodities in all states of the world. Any explanation of this phenomenon must be intimately connected with a theory of what functions these markets serve. The KeynesHicks theory of commodity futures markets is that they provide a mechanism by which risk averse speculators insure other risk averse traders who hold (positive or negative) stocks of a commodity subject to price fluctuation.' We propose a new explanation of the role of futures markets as a place where information is exchanged, and where people who collect and analyse information about future states of the world can earn a return on their investment in information gathering. In particular, it is shown how the private and social incentives for the operation of a futures market depend on how much information spot prices alone can convey from " informed " to " uninformed" traders. (Firms which have information about future states of the world are called "informed ", while firms who do not are called " uninformed ".) In equilibrium, without a futures market, informed firms will use their information about next period's price to make spot market purchases. The commodity purchase is stored in anticipation of a capital gain. Therefore, the trading activity of informed firms in the present spot market makes the spot price a function of their information. Uninformed traders can use the spot price as a statistic which reveals some of the informed traders' information. When the spot price reveals all of the informed traders' information, both types of traders have the same beliefs about next period's price. In this case there will be no incentive to trade based upon differences in beliefs about next period's price. In general the spot price will not reveal all of the informed traders' information because there are many other factors (" noise ") which determine the price along with the informed traders' information. This implies that in equilibrium with only a spot market, informed and uninformed traders will have different beliefs about next period's price. The difference in beliefs creates an incentive for futures trading in addition to the usual hedging incentive. When a futures market is introduced uninformed firms will have the futures price as well as the spot price transmitting the informed firms' information to them. This is the informational role of futures markets. The model has the following testable implications. The degree of predictability of a future spot price from only a current spot price determines the private incentives for futures trading in a commodity which has no futures market. For commodities with futures markets the volume of futures trading is directly related to how poorly current and futures prices predict the future spot price, relative to how well various exogenous variables predict the future spot price. " How well " refers to mean square prediction error conditional on available information, not biasedness of the predictions.
320 citations
TL;DR: In this article, the equilibrium distribution of market clearing prices is asymptotically normal with a standard deviation that varies inversely with the volume of trade, given underlying supply and demand conditions.
Abstract: A futures contract is to a forward contract as payment in currency is to payment by check. An organized market facilitates trade among strangers. Such a market trades a standardized contract under appropriate rules. The equilibrium distribution of market clearing prices is asymptotically normal with a standard deviation that varies inversely with the volume of trade, given underlying supply and demand conditions. Empirical relations giving the commission and margin per contract as a function of the volume of trade and outstanding commitments for 23 commodities support the theory. Also, comparisons of pertinent aspects of 51 commodities divided into active, less active, and dormant groups are consistent with the theory.
153 citations
TL;DR: In this paper, the authors tried to assess the ability of hedging to variability of feeder cattle marketing revenue through reduce revenue variability as compared to cash hedging, and found that hedging effectiveness in distant areas depends upon the basis relationship between futures market prices.
Abstract: Recent commodity price volatility and develop- will be more variable than at delivery points and ment of new futures contracts has kindled interest in correspondingly less effective in forward pricing of hedging among farmers in many parts of the country. the commodity in production. Existence and magniDue to the importance of feeder cattle production in tude of location basis variability is an empirical Kentucky and in the South generally, recent develop- question. In previous studies of production hedging in ment of a feeder cattle contract is of special interest. southern markets, Bobst found location basis variThis paper addresses some potential problems asso- ability a significant factor for fed cattle [1] but not ciated with use of feeder cattle futures markets by for hogs [2]. Kentucky producers. Specifically, it tries to: Samuelson [9] has suggested that variability of (1) determine the effect, if any, of location basis futures prices tends to increase as contracts near variability on ex post hedging results in Kentucky maturity. If this principle applies to feeder cattle markets versus delivery markets at Omaha and futures, then it may be possible to reduce the Oklahoma City, (2) assess the ability of hedging to variability of feeder cattle marketing revenue through reduce revenue variability as compared to cash hedging. marketing and (3) determining the presence of bias in During the study period, 1973-1976, the feeder feeder cattle futures prices. cattle futures market was characterized by low open All these factors are important in evaluating interest and trading volume as compared to more effectiveness of production hedging. Location basis established contracts in fed cattle and hogs.' Gray variability is a factor potentially associated with [6] has suggested that thin futures markets exhibit a hedging in areas distant from designated futures characteristic downward bias, i.e. futures prices contract delivery points. Hedgers in such areas would consistently underestimate eventual spot prices. If incur substantial transportation charges if they present in feeder cattle futures, such a bias would be attempted to discharge their contractual obligations an impediment to hedging in that expected hedging by delivery and, so, would seldom find delivery to be revenues would be lower than expected revenues a viable alternative to contract repurchase and sale of from cash marketings. the commodity in local cash markets. Therefore, hedging effectiveness in distant areas depends upon the basis relationship between futures market prices
4 citations