Showing papers on "Spot contract published in 1984"

The Informational Efficiency of Experimental Asset Markets

Abstract: A fundamental difficulty in devising any test of general efficient market hypotheses is the specification of the relevant public and private information sets of traders. Without a consensus as to reasonable empirical specifications, tests of the hypotheses remain minimal or controversial. In this study we examine the efficiency of experimental asset markets in which one may unambiguously identify the public and private information sets of traders. We focus on how market efficiency is affected by the presence of futures markets in settings that incorporate different types of uncertainty and inside information. Our experimental results support four conclusions: (1) market outcomes tend to evolve toward strong-form informationally efficient equilibria, whether or not futures markets and/or event uncertainty are present; (2) the presence of futures markets clearly stabilizes spot prices; (3) the presence of futures markets tends to speed the evolution of asset markets to more efficient equilibria where there ...

Intertemporal Commodity Futures Hedging and the Production Decision

Abstract: This paper deals with the producer's optimal use of commodity futures in hedging. The framework for analysis is an intertemporal consumption and investment model. The producer makes his production decisions at the beginning of the period and realizes his return at the end of the time interval. During the period, he faces both price and output uncertainties. In applying stochastic dynamic programming methods, this paper shows the effect of these risks on his consumption behavior. Further, the paper investigates his optimal hedging positions in the futures market over time and his optimal production decisions. Finally, implications of these results on the futures markets are discussed. THIS PAPER STUDIES a normative model of the farmer's optimal hedging strategy and consumption behavior in a continuous-time framework. Recent papers (for example, Berck [3], Rolfo [18], Stoll [21]) have analyzed the farmer's hedging strategies in a one-period context. These papers have provided interesting insights into the farmer's production decisions and the optimal design of futures contracts and markets. However, in a one-period model some rather restrictive conditions are imposed on the individual's behavior. For example, in these models an individual is assumed to ignore any information arrival process. As a result, the individual is assumed to adjust neither consumption behavior nor hedging positions to the changing state of the world during the production period. These conditions can be relaxed in a continuous-time framework. In an intertemporal context, the farmer's hedging problem may be viewed as follows. Since the farm income (at harvest) depends on both the spot price and the output (in bushels), the farmer is subject to both price and output uncertainties during the production period.1 When the farmer can hedge only in the commodity futures market, he cannot eliminate both the price and output uncertainties by any hedging strategy.2 As the farm income represents a significant portion of his wealth, he must necessarily hold an undiversified portfolio during the production period. Therefore, in essence, the farmer must solve for his investment/consumption behavior and his hedging strategy, facing the nonmarketable asset problem (Mayers [14]) in a multiperiod framework. In this context, one can see intuitively the major difference between a one

Equilibrium Valuation of Natural Resources

Abstract: The purpose of this paper is to provide a theoretical investigation of equilibrium spot and futures price behavior in a nonrenewable commodity market. The underlying commodity is nonrenewable in the sense that the reserve level of the commodity is expected to decline over time in the absence of successful discoveries of additional reserves. I wish to understand how the nonrenewable nature of the commodity influences the intertemporal extraction of the commodity, equilibrium spot price behavior, and the prices of derivative assets traded on the nonrenewable commodity. There is considerable disagreement among economists whether resources are exhaustible in the sense of resource constraints becoming binding on our society in the foreseeable future. Some economists have argued that natural resources are being depleted at

The Impact of GNMA Futures Trading on Cash Market Volatility

Abstract: Excerpt] A general conclusion that can be drawn from theoretical analyses of spot market volatility when futures markets exist is best summarized by Turnovsky [1983, p. 1364] who states "under their (theoretical studies) respective assumptions, the futures market almost certainly stabilizes the “spot price." This suggests that trading in futures contracts may originate when cash markets experience considerable volatility. Indeed, futures trading on a variety of financial instruments was initiated shortly after periods of historically high interest rates.

Deregulating the generation of electricity through the creation of spot markets for bulk power

Abstract: Deregulation of the electric utility system is complex because of the decisions that must be coordinated. The authors propose a way to solve these coordination problems and lead to an efficient, deregulated power system, but do not advocate or oppose its implementation without further study. Their proposal consists of a single regulated company that controls transmission and distribution, many independent generating companies, and consumers who buy at the current spot price. They offer their results as a model for evaluating other proposals to restructure electric utilities. They emphasize that any proposal for change should specify who will make decisions and to what incentives the decision makers will be asked to respond. The proposal can then be evaluated by comparing the decisions likely to be made under the new structure with those made under existing industry structures. 13 references, 2 figures, 4 tables.

Considering an Informational Role for a Futures Market

Abstract: This study compares how well current spot prices predict future spot prices for a variety of commodities in a non-futures market environment and examines how the predictive power of the price system is altered after the initiation of futures trading. The results indicate a positive association between the inability of a non-futures market price system to predict the future spot price and the subsequent development of a futures market. The claim that traders can earn a return on information collection after the introduction of a futures price into the pricing system is supported for some, but not all, commodities.

Reducing Volatility with Financial Futures

Abstract: Hedging with financial and currency futures contracts can substantially reduce fluctuations in the value of foreign currency, corporate bond, GNMA security and equity positions. The authors tested hedges involving a spot position in corporate bonds and a position in GNMA or U. S. Treasury bond futures; a futures and a spot position in GNMAs; a futures and a spot position in each of five broadly traded foreign currencies; and a futures aznd a spot position in the Value Line Index, the S&P 500 and the NYSE composite. In all cases, hedged positions proved significantly less risky, in terms of standard deviation, than unhedged positions. Use of the interest rate futures to hedge long-term bond positions resulted in 50 per cent reductions in the variability of spot price changes. Hedging reduced the risk of all but one of the foreign currencies and all of the stock market indexes by over 40 per cent.

Forward Market Equilibrium

Abstract: Economists have long been interested in the functioning of forward (futures) markets. Keynes and Hicks were the first to write persuasively in support of the theory of "normal backwardation." This theory says the futures price is biased downward relative to the expected future spot price as a means of compensating "speculators" for taking long futures positions [12; 8]. In this theory, speculators are viewed as providing insurance to hedgers who desire to take short futures positions to reduce the riskiness of their commodity holdings. In addition to "normal backwardation," there are theories of unbiasedness and "normal contango."' The unbiasedness theory says that the futures price equals the expected spot price while the "normal contango" theory says that the futures price exceeds the expected spot price [4; 19; 21]; however, the controversy over the three theories has not been entirely resolved. It has been suggested [4; 19] that each of the three theories could be applicable at various points during the planting-harvesting-processing cycle of a crop as the "net hedging demand" shifts from a large number of hedgers who desire to be short in the futures market to a large number of individuals who are long hedgers. Nonetheless, the traditional theories of futures markets have been criticized because they are not grounded in a general equilibrium model where participants' "tastes, endowments, and beliefs interact so as to generate a market equilibrium incorporating both speculative and non-speculative transactions" [9]. It is the purpose of this paper to provide a framework within which normal contango, normal backwardation, and unbiasedness can each occur for commodities which have certain well-specified characteristics, independent of the relative numbers of participants on each side of the futures market. In the spirit of [9], we consider the major source of uncertainty to be technological in nature (quantity risk) and argue that the commonly used definitions of hedger (one who sells forward some fraction of his crop yield) and speculator are not very useful for economic analysis. Instead, the more generally applicable concept of hedger as one who trades mean income for reductions in risk (in the Rothschild-Stiglitz sense [17]) is supported because it

Exchange Market Efficiency: A Semi-Strong Test Using Multiple Markets and Daily Data

Abstract: Following the method of Hansen and Hodrick (1980) we test the efficiency of the Canada-U.S.A. foreign exchange market by pooling information from contracts of five maturity lengths. The test is based on daily data from the period 1971 to 1980 inclusive. We show that these data reject the joint hypothesis of exchange market informational efficiency and no risk premlum. The degree to which foreign exchange markets are inefficient is of obvious importance. McKinnon (1976) has argued that a lack of speculative activity has led to excessive exchange rate turbulence and associated economic cost; this would be manifest in exchange inefficiency. Additionally, tests of the efficiency of the well organized foreign exchanges are of obvious value in the ongoing debate concerning the validity of the Rational Expectations Hypothesis. In this note we report the results of a test of the joint hypothesis of exchange market informational efficiency and no risk premium. The test is based on a generalized concept of the foreign exchange market. The study uses daily data on the Canada-U.S.A. market for the period 1971 to 1980 inclusive. In its most general form, Fama's condition for market efficiency is f(i,t) = E(f(i -j,t + j)14(t)) (1) where f (i, t) is the forward exchange rate prevailing at time t for a contract of maturity length i months; s1(t) is the information set available to market participints at time t; and E(-) is a conditional expectations operator. If condition (1) did not hold and transactions were Received for publication August 3, 1982. Revision accepted for publication February 10, 1984. *Nuffield College, Oxford, and Bank of Canada, respectively. The views expressed in this paper are those of the authors and no responsibility for them should be attributed to the Bank of Canada. We appreciate the comments and assistance of David Burton, Kevin Lynch, Donn Maccara, Barbara Macpherson, George Pickering, Heather Robertson, and two anonymous referees. This content downloaded from 157.55.39.163 on Wed, 21 Sep 2016 05:12:50 UTC All use subject to http://about.jstor.org/terms 670 THE REVIEW OF ECONOMICS AND STATISTICS costless, speculators could make risky profits by taking the appropriate long or short position. Thus the hypothesis of efficient markets which we test consists of two parts: the assertion that expectations are rational; and the postulation that speculators swiftly arbitrage away economic profits by exploiting valuable information. Equation (1) recognizes the fact that a speculator in the foreign exchange market has many trading strategies open to him (Caller, 1980). For instance, a speculator can buy a two month forward contract and hold it until it matures, in which case the corresponding speculative rate is the spot rate two months hence: alternatively one can buy a three month contract and match it with a one month contract which starts two months hence. If the foreign exchange market is efficient, the speculator should be indifferent between these two, and all other possible strategies, and no strategy should yield extraordinary profit. This formulation is in contrast to the more commonly used formulation of informational efficiency, f(i,t) = E(s(t + i) l4(t)), where s(t + i) is the spot exchange rate observed at time t + i. Clearly, this condition reflects merely a single instance of the general formulation (1). By examining the complete set of strategies implied by (1) we are better able to address the question of foreign exchange market efficiency. Consistent with the view that there exists a wide array of speculative strategies open to a speculator within the Canada-U.S.A. market, we model the speculator as basing decisions on prediction errors recently realized from various maturities of the same currency market. In previous studies of this nature, tests have often been based upon an information set involving a single currency and a single maturity length (Cornell and Dietrich, 1977; Levich, 1978; Blejer and Khan, 1980; and Longworth, 1981). Usually this has been done to avoid the problem of "overlapping observations," which will be further discussed below. However, the choice of a relatively coarse data frequency makes these tests less powerful, if the phenomena of interest are of extremely short duration, as was proved by Hansen and Hodrick (1980). Alternatively, economists have modelled speculators as basing their decisions on the information from multiple currency markets, all of the same maturity length (Geweke and Feige, 1979; Hansen and Hodrick, 1980). This is the normal method of transforming a "weakform" test (a test which uses only lagged regressands as explanatory variables) into a "semi-strong" test (which in addition to lagged regressands incorporates into the test other publicly available information). Our test is composed by pooling information from varying maturities for the same currency, instead of pooling information from different currencies of identical maturities. Our procedure seems to be an interesting alternative, primarily because of the information costs associated with speculating with many currencies. Speculation may be pictured as being a "currency specific" activity (with arbitrage occurring readily between maturity lengths of a given currency ratio), as well as a "maturity length" specific activity. I.e., speculators may concentrate their attention on the dollar-yen rate, rather than the three-month market. Thus, we would expect information to be disseminated quickly across maturity lengths; finding that information from one maturity length is not quickly disseminated to other maturities would be strong evidence against market

Economic model of the US uranium market

Abstract: An economic model of the US uranium market is developed using annual data for the period 1966-81. The model consists of five stochastic equations explaining uranium consumption, forward commitments, mine production, contract prices, and spot prices. A forecasting exercise is also undertaken. By way of essential background information, however, an analysis of current trends in the international uranium market is given, followed by a summary of historical price movements in the US uranium market. A brief discussion on the current state of the US market precedes the statistical analysis. 19 footnotes and references, 3 tables.

Spot market-risk market interaction and the protective effects of a tariff under uncertainty

Abstract: This paper discusses the interaction between commodity spot prices and secu-rity risk prices in determining the effectiveness of a protective tariff. The problem I address is that of an open economy facing price and production uncertainty in trade and having access to a securities market where claims to firms are traded. Such a description applies, for example, to Europe, Japan, the United States and many of the nations in Africa and Latin America. For these economies security prices determine industry supply decisions through their effect on market value. The paper therefore describes how risk prices are formed as distinct from commodity prices and describes their influence on tariff effectiveness in conjunction with spot prices. The model is the standard two-sector Heckscher-Ohlin model of trade except that I introduce an explicit financial sector in the market for firm securities and allow for technological uncertainty of the form

Information Diversity and Market Behavior: A Comment

Abstract: IN FIGLEWSKI [1], the author "construct(s) a model of a purely speculative market, in which speculation on price changes is the only motive for trading, and the return for investors as a group is zero, even though each trader possesses information which he believes will allow him personally to make a profit" (p. 90, lines 8-12).1 This "zero-sum game" of commodity speculation is "played" over several successive periods. In each period, ". . . information is released, the market opens and a market clearing price is established by tatonnement, so that investors know what the market price PM will be before they trade, and thereby obtain additional information about other traders' estimates of P* (the ultimate endof-period commodity spot price). They use this information to update their expectations and all trading (by the ith investor) is ultimately based on forecasts conditioned on both 4Ji (trader i's information set) and PM" (p. 91, paragraph 2). Of course, "investor i ... believes he has information that PM does not accurately reflect which will allow him to earn a speculative profit trading against the market" (p. 91, paragraph 3). Figlewski presents four theorems in his paper; the major result of his paper is Theorem 1.

Evaluation of spot prices

Abstract: It is necessary to be able to evaluate the cost of providing electric service on an hour by hour basis in order to effectively market electric energy in a fashion which meets both the utility's and its customer's needs; i.e. to offer appropriate rates, contracts, and load management options to the customers. This paper provides a methodology which uses the theory of spot prices to evaluate the variable costs of electric energy on an hourly basis. The methodology decomposes variable costs in components corresponding to generation fuel and maintenance, T and D network losses and maintenance, and generation and network quality of supply components arising from unserved energy caused by shortages of generation and network capacity. The methodology provides a choice between four different methods of revenue reconciliation to cover the capital and fixed costs of generation and the T and D network. Planning studies can be done using the methodology without developing large new computer programs. A numeric example is presented which exhibits large price variations depending on random weather and generator outages.

The value of a forward contract in foreign currencies

Abstract: Under some assumptions a valuation model for a forward contract in foreign currencies is developed. The model produces the value of the contract which is consistent with the value of other types of forward contract; the initial value is zero, and subsequent values are the present values of the differences between the forward rate when the contract is written and current forward rates.