Showing papers on "Spot contract published in 1990"

Stochastic Convenience Yield and the Pricing of Oil Contingent Claims

Abstract: This paper develops and empirically tests a two-factor model for pricing financial and real assets contingent on the price of oil. The factors are the spot price of oil and the instantaneous convenience yield. The parameters of the model are estimated using weekly oil futures contract prices from January 1984 to November 1988, and the model's performance is assessed out of sample by valuing futures contracts over the period November 1988 to May 1989. Finally, the model is applied to determine the present values of one barrel of oil deliverable in one to ten years time.

Chartists, Fundamentalists, and the Demand for Dollars

Abstract: The careening path of the dollar in recent years has shattered more than historical records and the financial health of some speculators. It has also helped to shatter faith in economists' models of the determination of exchange rates. We have understood for some time that under conditions of high international capital mobility, currency values will move sharply and unexpectedly in response to new information. Even so, actual movements of exchange rates have been puzzling in two major respects. First, the proportion of exchange rate changes that we are able to predict seems to be, not just low, but zero. According to rational expectations theory we should be able to use our models to predict that proportion of exchange rate changes that is correctly predicted by exchange market participants. Yet neither models based on economic fundamentals, nor simple time series models, nor the forecasts of market participants as reflected in the forward discount or in survey data, seem able to predict better than the lagged spot rate. Second the proportion of exchange rate movements that can be explained even after the fact, using contemporaneous macroeconomic variables, is disturbingly low.

Existence and Uniqueness of Multi-Agent Equilibrium in a Stochastic, Dynamic Consumption/Investment Model

Abstract: We consider an economy in which a set of agents own productive assets which provide commodity dividend streams, and the agents also receive individual commodity income streams, over a finite time horizon. The agents can buy and sell the commodity at a certain spot price and buy and sell their shares of the productive assets. The proceeds can be invested in financial assets whose prices are modelled as semimartingales. Each agent's objective is to choose a commodity consumption process and to manage his portfolio so as to maximize the expected utility of his consumption, subject to having nonnegative wealth at the terminal time. We derive the optimal agent consumption and investment decision processes when the prices of the productive assets and commodity spot prices are specified. We prove the existence and uniqueness of an "equilibrium" commodity spot price process and productive asset prices. When the agents solve their individual optimization problems using the equilibrium prices, all of the commodity is exactly consumed as it is received, all of the productive assets are exactly owned and the financial markets are in zero net supply.

Exchange Rate Forecasting Techniques, Survey Data, and Implications for the Foreign Exchange Market

Abstract: The paper presents new empirical results that elucidate the dynamics of the foreign exchange market. The first half of the paper is an updated study of the exchange rate expectations held by market participants, as reflected in responses to surveys, and contains the following conclusions. First, the bias observed in the forward discount as a predictor of the future spot rate is not attributable to an exchange risk premium, as is conventionally believed. Second, at short horizons forecasters tend to extrapolate recent trends, while at long horizons they tend to forecast a reversal. Third, the bias in expectations is robust in the samples, based on eight years of data across five currencies. The second half of the paper abandons the framework in which all market participants share the same forecast, to focus on the importance of heterogeneous expectations. Tests suggest that dispersion of opinion, as reflected in the standard deviation across respondents in the survey, affects the volume of trading in the market, and, in turn, the degree of volatility of the exchange rate. An example of how conflicting forecasts can lead to swings in the exchange rate is the model of "chartists and fundamentalists." The market weights assigned to the two models fluctuate over time in response to recent developments, leading to fluctuations in the demand for foreign currency. The paper ends with one piece of evidence to support the model: the fraction of foreign exchange forecasting services that use "technical analysis" did indeed increase sharply during 1983-85, but declined subsequently.

Forward contracts for the operation of an electricity industry under spot pricing

Abstract: A study is reported of the use of forward contracts as risk instruments for electricity industries operating under spot pricing. Forward contracts involve financial transactions or commitments which relate to a physical trade at a later time instance. Price setting and appropriate participant responses are discussed. Simulation studies are used to demonstrate that forward contracts offer participants an opportunity to reduce their risk exposure without removing the incentive to respond to higher spot prices. >

Delivery Uncertainty and the Efficiency of Futures Markets

Abstract: This paper examines the effects of the delivery basis risk embedded in nearly all futures contracts on efficiency tests of these markets. Examining soybean futures contracts, we show that delivery basis risk has important implications for market efficiency tests. As? suming no delivery basis risk, the market efficiency hypothesis is rejected. However, fu? tures prices contain signiflcant time-varying expected delivery basis and time-varying ex? pected delivery risk premiums. Once these expected delivery basis and delivery risk premiums are accounted for, the apparent inefficiency is eliminated. Equilibrium spot prices also contain signiflcant time-varying expected delivery risk premiums.

Rational expectations and commodity price forecasts

Abstract: The main purpose of this paper is to take a new look at the commodity market (CM) price forecasts in light of recent investigations. The CM forecasts are similar in nature to the survey expectations in that both solicit market experts' opinions about future price developments. However, there are important differences: CM forecasts are more of the consensus-type forecasts than survey data and deal with physical goods that are subject to different risks and constraints. The characteristics of the CM forecasts are reviewed in relation to the futures prices of the same commodities. This paper also estimates the alternative expectational models and tests the rationality of the expectational behavior.

Alternative instruments for smoothing the consumption of primary commodity exporters

Abstract: Countries that depend on a single primary export for their foreign earnings are likely to experience sharp fluctuations in export earnings and their underlying wealth, because of the instability of all primary commodity markets. As part of structural adjustment, several countries have liberalized their trade regimes, so domestic producers are no longer insulated from international price fluctuations. This paper concentrates on the management of country-level consumption risk, and considers actions which the government might undertake to reduce the cost of that risk. The paper reviews the costs of export price instability, with some reference to the empirical magnitudes. It considers the role of conventional instruments, including loans, price stabilization measures, and futures contracts. Particular attention is paid to the potential use of futures rollovers for longer-term price protection, and the effect of production response on that protection. The paper also discusses"commodity bonds"and dynamic consumption smoothing paths and offers conclusions.

Exchange Rate Forecasting Techniques, Survey Data, and Implications for the Foreign Exchange Market

Abstract: The paper presents new empirical results that elucidate the dynamics of the foreign exchange market. The first half of the paper is an updated study of the exchange rate expectations held by market participants, as reflected in responses to surveys, and contains the following conclusions. First, the bias observed in the forward discount as a predictor of the future spot rate is not attributable to an exchange risk premium, as is conventionally believed. Second, at short horizons forecasters tend to extrapolate recent trends, while at long horizons they tend to forecast a reversal. Third, the bias in expectations is robust in the samples, based on eight years of data across five currencies. The second half of the paper abandons the framework in which all market participants share the same forecast, to focus on the importance of heterogeneous expectations. Tests suggest that dispersion of opinion, as reflected in the standard deviation across respondents in the survey, affects the volume of trading in the market, and, in turn, the degree of volatility of the exchange rate. An example of how conflicting forecasts can lead to swings in the exchange rate is the model of "chartists and fundamentalists." The market weights assigned to the two models fluctuate over time in response to recent developments, leading to fluctuations in the demand for foreign currency. The paper ends with one piece of evidence to support the model: the fraction of foreign exchange forecasting services that use "technical analysis" did indeed increase sharply during 1983-85, but declined subsequently.

Testing for symmetry in OPEC official price reaction to the spot price in tight and weak market conditions

Abstract: (1990). Testing for symmetry in OPEC official price reaction to the spot price in tight and weak market conditions. Applied Economics: Vol. 22, No. 5, pp. 605-616.

The rational expectations hypothesis in models of primary commodity prices

Abstract: The purpose of this paper is to examine the implications of the rational expectations hypothesis for the econometric modeling of primary commodity markets. Muth's Rational Expectations Hypothesis (REH) revolutionized economic theory and modeling on price formation in a simple agricultural market. The author studied the results of the few econometric models of primary commodity markets that have incorporated the REH. In a commodity price model, it is useful to distinguish between application of the REH to the physical production and consumption relationships and its application to how intertemporal stockholding affects short term price determination. In practice, most econometric work has concentrated on the implications of the REH for stock and price relationships.

Testing unbiasedness in futures markets: A clarification

Abstract: where 5,,^ is the spot price at maturity time, m, for the j-th futures contract, and Fi,m-n is the futures price of the i-th contract n days prior to maturity time, m. The empirical test of the unbiasedness involves the use of an OLS estimate of the eq. (1) to perform an F test on the joint null hypothesis: a = 0 and b = 1. The collective evidence from previous studies suggest that a > 0 and b < I; i.e., the unbiasedness hypothesis is rejected in the futures markets. In a recent article of this Journal, Maberly (1985) questions the validity of an OLS procedure estimating eq. (1). Maberly argues that the OLS estimates are biased as a result of an ex-post censored data problem related to the forecast error. Ex-post the forecast error and the forecast are negatively correlated. More recently, Elam and Dixon (1988) disagree with this characterization of the source of the problem. They argue that if the spot/futures price changes follow a random walk, eq. (1) turns in a regression model with a lagged dependent variable and it is then this lagged dependent variable which has caused an excessively higher number of rejections of the unbiasedness hypothesis in previous studies. Based on Elam and Dixon (1988), if the spot price is described by the following nonstationary process,

Commodity price forecasts and futures prices

Abstract: The International Commodity Markets Division (CM) of the World Bank started forecasting primary commodity prices more than two decades ago. The forecast accuracy, or forecast biases and informational efficiency, has been a major concern and the subject of occasional retrospective studies. This paper explores the relationship between commodity futures prices and price expectations. It focuses of the usefulness of futures prices as a short-term price forecasting tool. In 1989, Froot and Frankel used survey data on exchange rate expectations to estimate the relative importance of risk premium and expectational error in explaining the forward discount biases in foreign exchange rates. They found that expectational errors dominate the forward discount bias and that the risk premium is small, relatively stable, and not correlated with the expectational error. This paper follows the Froot and Frankel analysis to see if commodity prices exhibit similar characteristics. It goes a step further and estimates a relationship between futures prices and price expectations. The paper summarizes the characteristics of the forecast and futures price data, tests the rationality of futures prices and decomposes the futures price bias. It also conducts direct statistical tests of the importance of risk premium and expectational error.

Future manipulation with "cash settlement"

Abstract: This paper investigates the susceptibility of futures markets to price manipulation in a two-period model with asymmetric information and "cash settlement" futures contracts. Without "physical delivery," strategies based on "corners" or "squeezes" are infeasible. However, uninformed investors still earn positive expected profits by establishing a futures position and then trading in the spot market to manipulate the spot price used to compute the cash settlement at delivery. The authors also show that as the number of manipulators grows, profits from manipulation fall to zero. However, even in the limit, manipulation still has a nontrivial impact on market liquidity. More broadly, they interpret manipulation as a form of endogenous "noise trading" which can arise in multiperiod security markets. Copyright 1992 by American Finance Association. (This abstract was borrowed from another version of this item.)

Non-existence and inefficiency of equilibria with American options and convertiblle bonds

Abstract: We analyze three different examples of economies with incomplete financial markets. In the first model we consider a bond and a convertible bond, and in the second model a stock and an American put option on the stock. Although there is only one commodity and asset payoffs therefore do not depend on spot prices, we derive robust non-existence of equilibria in both cases. In the last example we consider American call options with normal striking prices. We show that in equilibrium the asstes can never span. The Arrow-Debreu allocation cannot be implemented and the equilibrium is inefficient. This example is also robust.

Gold futures prices: An investigation into the theories of storage and forecast power and premium

Abstract: There are two principal theories of commodity futures prices. The theory of storage, which explains the difference between contemporaneous futures and spot prices (the basis) in terms of interest rates, warehousing costs, and convenience yields, and the theory of forecast power and premium, which is based on the assumption that the futures price is a biased estimate of the expected spot price. This research paper examines the applicability of the two theories to the pricing of short term gold futures contracts. The findings suggest that, in terms of the theory of storage, the basis variability is explained principally by interest rate changes for contracts of between three and six months duration, while for one-month contracts varying convenience yields appear to be the dominant factor. The low basis variability of gold futures contracts results in inconclusive findings with respect to the theory of forecast power and premium. There is, however, evidence to suggest that the basis contains some ability to predict the expected premium or bias.

The market making of forward contracts with premature delivery provision

Abstract: Money center banks offer a specialized foreign exchange contract which allows the customers the option of settling the contract by delivery prior to the pre-specified expiration date, thereby reducing risk exposure to the fluctuations of foreign exchanges. The banks price the contract in a way which implies that the option available to the customers has no value. The purpose of this paper is to model this contract and to produce numerical values for its price under several sets of assumptions. In the absence of empirical data on market prices the numerical results can only be simulated. It is shown that banks tend to mis-price this contract. Analysis of the contract has implications to the pricing of prepayable mortgages, callable bonds and Mark to marking of futures contracts.

Long Term Contracts in International Trade

Abstract: Countertrade agreements in international trade refer to a practice in which an exporter agrees to purchase in the future, from the importer, commodities proportional to his original export sale. The paper analyzes why it might be efficient for agents to undertake trade through a reciprocal long-term transaction rather than a conventional spot transaction. More specifically, the paper argues that countertrade represents a rational response to market incompleteness because it allows the forward selling of commodities where no organized futures market exists. In this way countertrade helps reduce risk by providing information on future market conditions and by offering insurance against random fluctuations in these conditio. ; Commodities; Futures Market; Incomplete Markets; International Trade

In a general equilibrium model

Abstract: Optimal futures hedging and equilibrium futures price bias are examined in a model characterized by two consumption goods, one of which has stochastically varying output, and where information arrives sequentially. Positive (negative) complementarity in consumer preferences promotes downward (upward) bias in the futures price viewed as a predictor of the later spot price. I demonstrate that the conclusion derived from partial equilibrium analysis-that when speculators are risk averse, risk premia are a function of hedging pressure-fails in the general equilibrium analysis, so long as there are no transaction costs. A counterexample is analyzed in which, as consumers' additive logarithmic preferences are varied, producers' hedging positions change from long to short, while the futures risk premium remains unchanged. However, hedging pressure is reinstated as a force influencing risk premia in the sense that the futures price is downward biased when hedgers take short positions and is upward biased when hedgers take long positions, provided it can be assumed (as is usually valid) that fixed setup costs of trading deter consumers more than producers from participating in the futures market.