Showing papers on "Spot contract published in 1980"

Forward Exchange Rates as Optimal Predictors of Future Spot Rates: An Econometric Analysis

Abstract: This paper examines the hypothesis that the expected rate of return to speculation in the forward foreign exchange market is zero; that is, the logarithm of the forward exchange rate is the market's conditional expectation of the logarithm of the future spot rate. A new computationally tractable econometric methodology for examining restrictions on a k-step-ahead forecasting equation is employed. Using data sampled more finely than the forecast interval, we are able to reject the simple market efficiency hypothesis for exchange rates from the 1970s and the 1920s. For the modern experience, the tests are also inconsistent with several alternative hypotheses which typically characterize the relationship between spot and forward exchange rates.

Tests of Rational Expectations in the Forward Exchange Market

Abstract: This paper presents tests of the hypothesis that, during the current period of floating exchange rates, the forward rate has been equal to the expected future spot rate. These are tests of rational expectations if there are no transactions costs or risk premia. Progressively broader definitions of the information set (upon which expectations are conditional) are taken. When the sample period is started in mid-1974, rather than in early 1973, the deutsche mark passes all tests. Other currencies, such as the seth thpound, fail one or more tests. A statistical rationale for this finding, involving the possibility of discontinuously large errors, is suggested.

The "Speculative Efficiency" Hypothesis

Abstract: The hypothesis that forward prices are the best unbiased forecast of future spot prices is often presented in the economic and financial analysis of futures markets. This paper considers the hypothesis independently of its implications for rational expectations or market efficiency and in order to stress this fact, the term "speculative efficiency" is used to characterize the state envisaged under the hypothesis. If a market is subject to efficient speculation, the supply of speculative funds is infinitely elastic at the forward price that is equal to the expected future spot price. The expected future spot price is a market price determined as the solution to the underlying rational expectations macroeconomic model. Although the paper is primarily concerned with testing this hypothesis in the foreign exchange market, the methodology introduced in the paper is of general application to all futures markets.

Efficiency and Premiums in the Short-Term Money Market

Abstract: THE QUESTION OF THE STRICT EFFICIENCY of the treasury bill market and markets in other fixed interest financial instruments remains in dispute. Roll [17] provided the first test of market efficiency. More recently Fama [5], taking a different approach, added his support to Roll's findings of a market conforming "closely to the efficient market model." Related contemporaneous work by Fama tested efficiency indirectly through the implicit estimate of inflation derivable from term structure relationships [3, 4, 6]. It is this work that has been attacked by Nelson and Schwert [13], Carlson, [2], and Joines [10], who have argued that Fama's approach, when suitably corrected, does not support market efficiency as Fama has defined it. In this paper we will consider only short-term interest rates, determined in a market not previously examined by earlier authors, where sums are lent and borrowed for periods of one or two days. The main thrust of the paper is the analysis of the differences between implicit forward rates and future realized spot rates. The problem we attempt to resolve is whether forward rates can be used to predict future spot values, and the implications this has for market efficiency. If it should prove possible to construct forecasts of the future spot rate more accurate than those implicit in the term structure relationships, then such a finding would undermine the view that fixed interest markets are efficient. To carry out this test, as earlier authors have shown, it is necessary to develop models of how expectations are

The Effects of Supply Contracts on the Output and Price of an Exhaustible Resource

Abstract: An analysis of the effects of contracts on exhaustible resources reaches three conclusions: (1) When the perceived risks for a single mine increase, production for the spot market falls, the optimal amount under long-term contracts increase, total production falls, contract length generally decreases, equilibrium spot prices increase, and contract prices may rise or fall. (2) When past production changes mining economies, spot prices rise and then fall in a scalloped pattern even - when entry of new mines and storage by purchasers is permitted. (3) The social efficiency of spot prices permits paired gains for some, losses for others, and market prices that give indecisive signals. 30 references, 5 figures.

A Semi-Strong Form Evaluation of the Efficiency of the Hog Futures Market: Comment

Abstract: greater forecasting merit than did the respective futures prices, the authors concluded that the hog futures market is semi-strong inefficient. As LH observe, an efficient market has been defined by Fama as one in which prices fully reflect all available information. For any test of the efficient markets hypothesis (EMH) to be operational, one must identify relevant explanatory variables and the specific nature of the linking relation. Thus, any test of the EMH is, at the same time, a test of the postulated model. The LH model has little, if any, basis in theory; therefore, the model itself would be a prime suspect in any test of market efficiency. LH state, "The hog futures prices cannot consistently be relied upon to reflect accurately subsequent spot prices, and thereby the market is not considered efficient." LH have destroyed a straw man; the EMH does not say, imply, or hint that futures prices in an efficient market can be relied upon to reflect subsequent cash prices accurately. Instead, the EMH does state that known information is impounded in current price, so that all desirable characteristics of the investment (usually expected return) are in equilibrium with all undesirable characteristics of the investment (usually covariance of return with that of the market portfolio). Unless returns resulting from the use of a pricing model like that of LH are found to be in excess of returns justified by risk, the EMH cannot reasonably be rejected. Thus, for an appropriate test of market efficiency, it would be necessary to determine whether returns received from trading based on the econometric model exceed normal returns adjusted for risk. As Rendleman and Carabini (p. 913) state, "To determine the extent of the (Treasury Bill Futures) market, it is necessary to assess the significance of the quasi-arbitrage returns that could have been earned." If risk cannot be

Aspects of hedging theory.

Abstract: In this paper, interpretative comments are offered on some established aspects of the economics of futures trading, including the nature of the equilibrium condition in the case of an inverse carrying charge, some inferences about traders' market positions made from estimates of returns, and the implications of the normal backwardation hypothesis in cases where hedgers are net long. The paper also includes a survey of the recent literature on the forward pricing function of futures markets, with a discussion of, inter alia, the methods used to investigate the hypothesis that futures prices are anticipations of delivery date spot prices, and the possible reasons why some markets perform this function better than others.

Selected fundamental and technical pricing strategies for corn.

Abstract: December futures prices during the growing season for corn were predicted as a function of estimated ending stocks and estimated production. Predicted futures prices were incorporated into hedging strategies. Strategies using predicted futures prices were superior to routine hedging, but not superior to strategies using technical price indicators. Routine hedging reduces price variability [1,3,4,6]. However the reduction in price variability comes at the expense of lower average prices. In an attempt to determine if selling price can be maintained or improved while reducing price variation, Purcell and Richardson [8], Link [5], and Brown and Purcell [2] have incorporated both technical and fundamental price analysis into their hedging strategies. Their results indicate the possibility of attaining higher average prices without increased price variation. To date there is little published literature on hedging strategies for corn that incorporates technical and fundamental price analysis. This article reports on the value of technical and fundamental price forecasting mechanisms in pre-harvest corn hedging strategies during 19731978. Emphasis is on the development of a price forecasting equation for December corn futures prices, estimation of the price model, incorporation of this model into selective hedging strategies, and evaluation of these strategies compared to technical strategies. In formulating the price model, every attempt was made to keep the model simple and to use only data available to producers on a timely basis. THEORETICAL DEVELOPMENT OF PRICE MODEL The basic components of demand for U.S. produced corn are domestic feed use, exports, and food, industrial, and seed uses. In 1977-1978 approximately 60 percent was used for domestic feed, 31 percent was exported, and 9 percent was for food, seed, or industrial uses. Since industrial use varies little from year to year, corn price variation is largely dependent on changes in feed demand, export demand, and supply. The demand for corn by the livestock industry is a derived demand. The quantity of corn demanded is a function of the price of corn, the price of feeder animals and other inputs in feeding livestock, and the price of finished livestock animals. Changes in corn price come from shifts in supply, which constitute movement along the demand function for corn. Changes in the prices of other inputs in feeding livestock or the price of the livestock output would constitute a shift in the domestic demand for corn as feed. Since per head feeding rates are relatively constant in the short run and the feeding process for hogs and cattle is four to six months long, the demand for feed will be highly correlated with the number of animals on feed. The other major determinant of demand for U.S. corn is exports. The major use of corn by importing countries is for feed. As for the U.S., the major short-run determinant of feed demand is the number of animals on feed, livestock prices, and the price of other feed ingredients. Export demand for U.S. corn is therefore influenced by foreign production. When foreign production is below desired levels, countries might seek to import corn rather than liquidate livestock herds. Since weather is unpredictable, production levels are unpredictable and export demand can change quickly. The U.S. government monitors weather and livestock numbers around the world in an attempt to anticipate foreign demand. In addition to unpredictable weather conditions, unexpected political decisions can cause substantial changes in export demand for U.S. corn. Together these factors make forecasting export demand difficult. The short-run supply of corn can be divided into two stages-pre-harvest and post-harvest. During pre-harvest, expected corn supply in a marketing year (t) is a function of planted acres and expected prices of alternative crops, input prices, government programs, and technological restraints. Once planted acreage is determined, supply is essentially determined by weather as it affects yield and the ratio of harvested to planted acreage. After harvest, corn supply is fixed, equaling current production plus ending stocks from marketing in period t-1. Supply is known at the beginning of period t. Demand in t is an estimate of expected feed, export, and industrial use and may shift during marketing period t. Expected feed use in the short The authors are associate professor, Department of Agricultural Economics, Virginia Polytechnic Institute and State University, Blacksburg, Virginia, and planning/marketing specialist, Corpcrate Planning, J. I. Case Company, Racine, Wisconsin, respectively. This content downloaded from 157.55.39.212 on Fri, 10 Jun 2016 04:35:38 UTC All use subject to http://about.jstor.org/terms 138 NORTH CENTRAL JOURNAL OF AGRICULTURAL ECONOMICS, Vol. 2, No. 2, July 1980 run is highly correlated with livestock numbers on feed. During t, production in t+1 is estimated first based on announced planting intentions and later on actual planted acres, historical yield, and estimated ratio of harvested to planted acres. Demand in t+1 is estimated based on expected feed, export, and food demands in t+1. Since corn is a storable commodity, the price (Pt) during t and estimated carryover stocks (ECSt) at the end of marketing period t, are a function of supply and demand in both t and t+1. Given a fixed supply in t, an increase in demand caused by a change in livestock numbers on feed (LNFt) or exports. (Et) in t raises Pt and decreases ECSt. Thus, we expect a negative relationship between Pt and ECSt and a positive relationship among Pt and Et and LNFt. Supply shifts in t+1 affect prices in t via storage between the two marketing periods. Given demand and supply in t, an increase in expected supply in t+1 holding demand in t+l constant will lower expected prices in period t+1. Lower expected prices in t+1 will reduce the incentive to store corn from period t to t+1. Thus, sales will increase in period t, decreasing price and reducing carryover stocks in period t. Thus, we expect supply increases in t+1 and price in t to be inversely related. Using the same logic, demand increases in t+1, ceteris paribus, should be positively related to prices in period t. Demand shifts in t and t+1 are most likely to result from changes in exports (E) or livestock numbers on feed (LNF). Supply in t+1 is dependent on expected input and output prices in t+1 and yield. However, after mid-January, when planting intentions have been made public, expected production in t+1 (EPt+I) can be estimated based on intended acreage and historical yields. After planting, the major source of variation in St+1 is yield variation caused by weather (W). Based on these considerations, price in t can be expressed as: (1) Pt = f(ECSt, Et, Et+,1 LNFt, LNFt+I, EPt+1, Wt). This equation is attractive for two reasons. First, this single equation should capture the impact on price of changing supply and demand in t and t+l without estimating all the separate supply and demand functions in each period. Second, USDA provides continually updated short-run estimates of all the variables in the price relationship. This eliminates having to predict the values of the independent variables, makes the equation relatively easy to use, and permits quick determination of new price forecasts each time new information becomes available. The theoretical development to this point has been in terms of cash prices. The pricing decisions made during the growing season will be based on futures prices. Working [10, p. 15] has shown that "...expectations which deserve to influence the price of the most distant futures quoted should always bear equally on spot prices..." Tomek and Giray [9, p. 373] demonstrate that "the element of expectations is imparted to the whole temporal constellation of price quotations, and futures prices reflect essentially no prophecy that is not reflected in the cash prices and is in that sense already fulfilled." Hence, the factors that determine cash and futures prices are almost identical, and a change in supply and demand expectations affects cash and futures equally. Therefore, the cash price Pt in Equation (1) can be replaced by the December futures price (FPt) and used to provide forecasts of December corn futures prices during the growing

Futures Markets: The Interaction of Economic Analyses and Regulation: Discussion

Abstract: We commend our speakers for interesting and thought-provoking papers. However, neither focuses clearly on the theme of this session. Peck comes the closest with an analysis of market composition between hedging and speculation. But, this dichotomy has proven to be of limited value in futures market regulation. I fear it also has limited value as a research tool. Sandor and Sosin present a useful historical review of the evolution of the GNMA futures contract, but its regulatory implications are unclear. Futures market regulation continues to be a ballgame in which lawyers are carrying the ball, with economists on the sidelines. Public criticism of futures markets over the years, as Peck points out, has been heavily concentrated on speculation. Futures markets facilitate speculation and speculation is considered objectionable for two main reasons. First, to many people, speculation is synonymous with price distortion or manipulation. Second, speculation is said to contribute to frequent and unwarranted variability in futures prices as well as in spot prices. These criticisms are long-standing and reflected in the futures market regulatory legislation which mandates the close monitoring and control of speculation through a reporting system and speculative position limits. Experience has shown, however, that fixed speculative position limits are ineffective regulatory tools. Speculators are not a greater threat to efficient market performance than hedgers whose normal operations often involve large positions in both cash and futures. Efficient futures markets require both hedgers and speculators. The economic distinction between them is more illusory than real. The real problem, in-my view, is that economists have not done a very good job in helping the general public distinguish between speculation and manipulation. The two terms are not synonymous. It is price distortion or manipulation, regardless of its source, that demands more study rather than speculation, per se. What is price distortion or manipulation? How can it be detected? Is it a problem in maturing futures in certain delivery months? What constitutes "orderly markets" and "orderly trading" in the delivery month? Unless reasonable answers to such questions are obtained, I fear we are headed for more rigid government controls on futures trading, which could have deleterious effects on mar-

A Study of the Economic Functions of the Maine Potato Futures Market

Abstract: In an update and extension of prior work this study found that the potato futures markets continued to provide very unreliable forecasts of subsequent spot prices. On the other hand and contrary to some past studies an extensive study here failed to turn up any convincing evidence of a cobweb pricing relationship. Moreover the increasing volatility of potato futures prices in the more recent time period raises questions regarding their value as hedging vehicles. Finally it is argued that the market's efficiency might be improved by expanding the current Maine potato contract to permit delivery of round white potatoes grown outside Maine.

Covering Foreign Exchange Risks: Comment

Abstract: In a recent article, Jorge Calderon-Rossell [1] examines the cost of alternative methods for hedging foreign exchange risk and provides a framework for the manager to use in choosing between the two methods. Calderon-Rossell's analysis is based on an incorrect construction of the money market hedge which adds an uncertain element to the firm's position. The purpose of this comment is to indicate that the cost of cover as defined by Calderon-Rossell is certain for both hedging techniques and that a wellknown theorem of foreign exchange indicates clearly when one alternative is less costly than the other. That being the case, Calderon-Rossell's analysis of the choice of hedging technique decision is irrelevant. Calderon-Rossell uses the premium or discount as the cost of hedging. While that view is often encountered in the literature, it is not held by me. I prefer the argument that the cost of hedging is the difference between the forward rate and the expected future spot rate, but this issue is not addressed in this comment because it is not relevant to the point being made. Whichever cost of hedging is used, the costs of the alternative methods will (4) below holds. be identical if Equation

Forward Exchange Policy

Abstract: In earlier chapters the forward exchange rate, and its relation to the spot rate, was viewed as a key element in international arbitrage. A significant proportion of international capital transfers is conducted on a covered basis, and the forward market is an important medium for exchange-market speculation.