Showing papers on "Spot contract published in 1988"

Business Cycles and the Behavior of Metals Prices

Abstract: The theory of storage says that the marginal convenience yield on inventory falls at a decreasing rate as inventory increases. The authors test this hypothesis by examining the relative variation of spot and futures prices for metals. As the hypothesis implies, futures prices are less variable than spot prices when inventory is low, but spot and futures prices have similar variability when inventory is high. The theory of storage also explains inversions of "normal" futures-spot price relations around business-cycle peaks. Positive demand shocks around peaks reduce metal inventories and, as the theory predicts, generate large convenience yields and price inversions. and Telser, many tests of the theory use inventory data to test the hypothesis that the marginal convenience yield on inventory falls at a decreasing rate as aggregate inventory increases. Inventory data are always a problem in this approach. It is usually unclear how aggregate inventory should be defined. For example, how should one treat government stocks? Moreover, like the metals we study, many commodities are produced, consumed, and traded internationally, and the accuracy of aggregate inventory data is questionable. Our tests of the theory of storage are also based on the hypothesis that the marginal convenience yield declines at higher inventory levels but at a decreasing rate. Rather than test the hypothesis by examining the inventory-convenience yield relation directly, however, we test its implications about the relative

Self-Enforcing Wage Contracts

Abstract: We examine long-term wage contracts between a risk-neutral firm and a risk-averse worker when both can costlessly renege and buy or sell labour at a random spot market wage. A self-enforcing contract is one in which neither party ever has an incentive to renege. In the optimum self-enforcing contract, wages are sticky: they are less variable than spot market wages and positively serially correlated. They are updated by a simple rule: around each spot wage is a time invariant interval, and the contract wage changes each period by the smallest amount necessary to bring it into the current interval.

Interest rates and insurance price cycles

Abstract: Property liability insurance prices and profits appear to move in a six year cycle. The common explanation for the cycle amongst many industry analysts is that the insurance market is inherently unstable and that prices fail to converge on clearing levels. Our explanation is different. We identify spot equilibrium prices using the Capital Asset Pricing Model. But informational, regulatory and contractual lags preclude instantaneous adjustment. We therefore model the temporal movement of prices using a partial adjustment model in which actors form rational expectations. The actual movement of insurance prices does seem to track closely those estimated by the partial adjustment model. The cycle may be better viewed as a series of converging responses to changing spot prices.

An empirical analysis of implicit delivery options in the treasury bond futures contract

Abstract: Assuming perfect, frictionless and efficient markets, this paper develops a framework to estimate the composite value of the quality, wild card and end-of-month options implicit in the T-bond futures contract. The value of delivery options is shown to be the excess of forward price of the cheapest bond over its conversion factor times the exercise price of futures contract. Empirical results indicate that the option values over the last quarter of the nearby contract are on average less than 0.5 percent of the mean futures price, which is substantially lower than the value reported by previous studies. Further scrutiny reveals that although the empirical estimates are contaminated by non-synchronous bond data, they are consistent with certain known theoretical properties of option values.

Forward and Futures Markets and the Competitive Firm under Price Uncertainty

Abstract: Recent remedies for managing the output price risk faced by a competitive firm sometimes include the prescription of hedging. This practice usually entails combining spot market sales with trading opportunities in forward or futures markets. The forward hedge represents a risk free price. The futures hedge offers a risky alternative which arises because of basis, the variable relationship between the spot and futures quotations. Rather than treating forward and futures as mutually exclusive or as perfect substitutes, a competitive firm can carefully construct a portfolio which combines spot, forward, and futures positions. Holthausen [9] and Feder, Just, and Sclmitz [5] (hereafter FJS), initiate an extensive discussion of a risk-averse firm which uses futures contracts when faced with an uncertain output price but no basis risk. Both articles employ general utility and density functions to derive their results. Their conclusions include independence of the production decision from the probability density of the spot price and the firm's degree of risk aversion. Extensions of these two articles usually focus on the robustness of the separation conclusion to either the addition of basis or the addition of production uncertainty to the models. The risk free characteristic that Holthausen and FJS attribute to futures contracts really better describes a forward contract. Jarrow and Oldfield [11], Paul, Heifner, and Helmuth [17], and many others document the importance of recognizing the unique charapteristics of these two different types of contracts. Batlin [2] builds on the Holthausen and FJS foundation by adding basis risk to his model. FJS explicitly qualify their model as applicable to only those commodities with little or no production uncertainty. Subsequent articles augment their analysis with the condition of stochastic production. Chavas and Pope [3], Anderson and Danthine [1], Marcus and Modest [15], Ho [8], and Grant [6] all include production uncertainty in different permutations of the fundamental model. Those which simultaneously include both basis and production risk achieve analytical solutions by assuming specific utility or density functions.

'Front-Running' - Insider Trading Under the Commodity Exchange Act

Abstract: On ‘Black Monday,’ October 19, 1987, ‘perhaps the worst day in the history of US equity markets,’ the Dow Jones Industrial Average fell by 508 points, representing a loss of approximately $1 trillion in the value of all outstanding United States stocks In the wake of the crash, numerous studies were conducted and reports published in which a host of regulatory issues were considered, including a disturbing phenomenon called ‘front-running’ Simply stated, the practice of front-running involves a transaction in a commodity futures contract or a stock option contract by a trader with ‘material’ nonpublic information concerning a ‘block’ transaction in the commodity or security underlying the futures or options contract To be material, the block transaction must be of such a size that it will cause a price change in the futures or options contract and thereby allow the front-runner to profit from the offsetting options or futures position In actuality, front-running is more complex than this definition suggests It encompasses at least three forms of conduct, each of which raises different regulatory and policy issues They are: (1) trading by third parties who are tipped on an impending block trade (tippee' trading); (2) transactions in which the owner or purchaser of the block trade itself engages in the offsetting futures or options transaction as a means of ‘hedging’ against price fluctuations caused by the block transaction (‘self-front-running’); and (3) transactions where a broker with knowledge of an impending customer block order trades ahead of that order for the broker's own profit (‘trading ahead’)This Article will explore the background of front-running, and its regulation in the securities industry The Article will then focus on the spread of the practice to the commodity futures industry and the regulatory and policy issues raised by various forms of front-running It will then address whether the present statutory framework is adequate to prohibit undesirable front-running practices The Article proposes legislation to restrict such practices, and identifies surveillance methods that are needed to detect violations of necessary restrictions

Modelling Commodity Prices in a World Macroeconomic Model

Abstract: This paper describes work in progress to endogenise commodity prices in the OECD’s world macro—model INTERLINK. Part I gives the purpose of the work and an overview of the model and describes the modelling strategy. Part II gives results of empirical work on commodity price equations. Long run properties of estimated equations are reported, together with short run forecast performance. Simulation testing of the full model system incorporating the equations is still in progress at the time of writing and only preliminary results are available.

The Futures Market

Abstract: Publisher Summary This chapter discusses the futures market. A financial futures contract is a legally binding contract, affected in a central marketplace, to take or dispose of financial instruments/physical commodities at an agreed price on a specified date or dates in the future. It is not just a contract for the sale or purchase of actual commodities, currencies, or stock indices. It is an agreement to buy or sell a certain amount of these goods at a fixed price on a certain date in the future. Because they are contracts for delivery of goods in the future, traders can relieve themselves of their obligations by entering into an offsetting or opposite contract and closing the position without actually delivering the commodity. The essence of a futures market is the provision of interest rate or price protection for businesses and individuals who are vulnerable to extreme movements in financial instruments or commodities through risk transfer. One of the advantages of futures trading is the requirement to pay only a deposit rather than the full price of the goods on the opening of a futures contract. Also, traders may take advantage of price moves in either direction.

Dynamic equilibrium in a multi-agent economy : construction and uniqueness

Abstract: We study an economy with several agents, who receive endowment streams denominated in units of a certain commodity over a finite horizon. The agents can consume the commodity, and they can also trade it at a certain "spot price" >/>; the proceeds of these transactions can be invested in financial assets, whose prices are modelled by continuous semimartingales. The objective of each agent is to choose a consumption/investment strategy that will maximize his expected utility from consumption and allow him to post a nonnegative wealth at the terminal time. We provide explicit information about the optimal strategies of the individual agents when the price \p is given. We also show how to determine \f* according to the law of "supply and demand", which mandates that the commodity be consumed entirely as it enters the economy and that the net demand for each financial asset be zero. University Libraries Jarnegie Mellon University Pittsburgh, PA 15213-3890 Research supported by the National Science Foundation under grant DMS-87-23078. Research supported by the National Science Foundation under grant DMS-84-03166.

Optimum electric utility spot price determinations for small power producing facilities operating under PURPA provisions

Abstract: An algorithm is presented that allows a local utility to determine a set of spot prices that satisfy all regulatory and contractual restrictions while optimizing the revenues generated from a particular small power-producing facility. This is done under the constraint that the small power-producing facility is independently optimizing its own schedule while taking full advantage of the Public Utilities Regulatory Policies Act (PURPA) provisions. The proposed method fully addresses the delicate problem of potential multiplicity of optimum scheduling solutions. This is done using modified optimum spot prices, where the desired accuracy of the final spot prices can be explicitly taken into account. An example is provided to help illustrate the concepts described. >

Natural gas prices and contractual terms

Abstract: Recent changes in the natural gas transportation program have resulted in greater freedom for local distributors to contract for gas supplies. The authors examine a sample of recent long-term contracts to determine the relation between the initial price in the contract and other factors, such as the nonprice terms of the agreement and market conditions, as measured by a corresponding spot price. Non-price contractual terms are classified as affecting the future flexibility of the parties to adjust either the price or the quantities to be taken. Data envelopment analysis is used to calculate a performance index for each contract. The method can be used by state public utility regulators to focus attention on particular contracts in discussions with utility managers.

Pricing Behaviour in Australian Financial Futures Markets

Abstract: This paper identifies two major sets of issues which have been raised in the study of financial futures markets outside Australia. The first concerns the hypothesis of market efficiency, which asserts that futures prices fully reflect available information about subsequent prices in the physical markets. Secondly, there is the question of whether or not futures trading has a detectable influence on the short-term variability of spot prices. A weekly data set, covering each of the three main SFE contracts over the period from December 1984 to February 1988, is used to investigate the two sets of hypotheses. Statistical results generally support the efficiency hypothesis, the one clear exception being the case of the pre-crash sample for the SPI contract; a significant average discount was found in this case, indicating that the futures market may have anticipated the subsequent crash. In investigating potential causal links from futures markets to physical markets, two main findings are obtained. First, no link is detected from futures trading volumes to spot price volatility; and secondly, the data suggest that futures price movements have tended to lead spot price movements during the sample period by between one and two weeks. It is argued that this result is consistent with conventional theory, which suggests that prices will react to new information most quickly in those markets where transactions costs are lowest.

Spot Price Based Rates

Abstract: Chapters 6 through 8 presented the theory underlying the hourly spot price defined as follows: Hourly Spot Price: Marginal value of energy ($/kWh) for the next hour computed at the beginning of the hour assuming complete knowledge of the operating conditions, costs, etc., that will exist during the hour.

Energy Marketplace Transactions

Abstract: The hourly spot price is the basis of the energy marketplace because it provides the foundation for all transactions. Chapter I introduced three different types of transactions. This chapter discusses these transactions in more detail and relates them to present-day transactions rates.