Showing papers on "Spot contract published in 1992"

Contract Networks for Electric Power Transmission

Abstract: A contract network extends the concept of a contract path to address the problem of loop flow and congestion in electric power transmission systems. A contract network option provides an internally consistent framework for assigning long-term capacity rights to a complicated electric transmission network. The contract network respects the special conditions induced by Kirchoff's Laws; accommodates thermal, voltage, and contingency constraints on transmission capacity; and can be adopted without disturbing existing methods for achieving an economic power dispatch subject to these constraints. By design, a contract network would maintain short-run efficiency through optimal spot-price determination of transmission prices. Through payment of congestion rentals, the contract network makes a long-term capacity-right holder indifferent between delivery of the power or receipt of payments in a settlement system. to]Everybody talks about the weather, but nobody does anything about it.

Futures 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. We 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, we interpret manipulation as a form of endogenous "noise trading" which can arise in multiperiod security markets. CAN UNINFORMED INVESTORS PROFITABLY manipulate security prices by strategic trading? This question has long intrigued both economists and the general public. For economists, since Keynes (1936) and Friedman (1953) the issue of interest has been whether such manipulation can arise as an equilibrium phenomenon in the presence of rational market makers and other traders.' Prima facie, it might appear that manipulation requires a divergence between a security's price and its "value" which other market participants ought to recognize and profitably counteract, thereby offsetting any incipient manipulation. We show here, however, that this intuition is incorrect. Even if investors are risk-neutral (and hence risk-capacity limits as in De Long, Shleifer, Summers, and Waldmann (1990) are absent), profitable manipulation occurs in our model under a surprisingly weak set of assumptions. Our analysis is conducted in the context of a two-date model in which trade occurs first in a futures market followed by a spot market. The idea is simple. Suppose that an "informed trader" privately learns the value of the underlying asset before delivery, but that this value becomes public only after the

Was the Deflation during the Great Depression Anticipated? Evidence from the Commodity Futures Market

Abstract: Futures prices were well above spot prices for most commodities during most of the Great Depression; evidently the spectacular declines in agricultural prices caught many people by surprise. Based on the historical correlations between commodity prices and consumer prices, commodity markets anticipated stable consumer prices during the first year of the Great Depression. The dramatic drop in nominal Treasury bill yields, thus, should be read as a drop in ex ante real rates. Later in the Great Depression, markets anticipated deflation, but not as severe as actually occurred. Copyright 1992 by American Economic Association.

The Information Content of Prices in Derivative Security Markets

Abstract: Prices in futures and options markets reflect expectations about future price movements in spot markets, but these prices can also be influenced by risk premia. Futures and forward prices are sometimes interpreted as market expectations for future spot prices, and option prices are used to calculate the market's expectations for future volatility of spot prices. Do these prices accurately reflect market expectations? The information that is reflected in futures prices and option prices is examined in this paper through a review of both the relevant analytical models and the empirical evidence.

The derived demand with hedging cost uncertainty in the futures markets

Abstract: This study explores the significance of production technology and other parameters on the employment of inputs and hedging. The paper establishes an explicit relationship between the risk as well as prices parameters and the derived demand, production and hedging. The authors find that the futures price relative to the expected spot price affects the demand for production factors. Additionally, the presence of basis risk determines the impact of prices and risk parameters on the derived demand for inputs. Production technology is instrumental in fixing the size of the change in the demand, given a change in the model's parameters. Copyright 1992 by Royal Economic Society.

Does the forward premium/discount help to predict the future change in the exchange rate?

Abstract: This paper reexamines the relationship between the spot exchange rate depreciation and the forward premium. Many researchers report a negative, and occasionally significant, coefficient when the spot depreciation is regressed on the forward premium. The authors' analysis reveals that such findings are due to the presence of structural breaks and/or outliers in the data. After allowing for these, the forward premium has no information at all about the future change in the spot exchange rate. This finding is a direct implication of the spot rate being, approximately, a random walk and the covered interest parity holding. Copyright 1992 by Scottish Economic Society.

Long-Term Contracting and Multiple-Price Systems

Abstract: This article examines product markets in which long-term contracts and spot transactions coexist. Such markets are characterized by "multiple-price systems," wherein adjustment to supply and demand shocks occurs through spot prices, while contract prices are fixed or adjust slowly. The authors derive the existence of contracts, as well as the equilibrium fraction of spot trade, in the framework of an optimizing model and analyze the effects of shocks on market equilibrium when some buyers and sellers "locked in" contractually. The model is employed to interpret the change in the copper market from a multiple-price system to one characterized solely by spot trade. Copyright 1992 by University of Chicago Press.

A Monte Carlo model for calculating spot market prices of electricity

Abstract: The authors describe a model for calculating the spot price of electricity of a typical electric power system. The model combines economic dispatch calculations with loadflow and customer response functions in a Monte Carlo simulation model. The model contributes to the implementation of spot prices by providing a practical means of evaluating the spot price of a typical electric power system. It offers several different approaches for calculating generation curtailment premiums and transmission congestion charges. The model formulation is presented and its application is illustrated with case study results. >

Does Foreign Exchange Intervention Matter? Disentangling the Portfolio and Expectations Effects

Abstract: The time is ripe for a re-examination of the question whether foreign exchange intervention can affect the exchange rate. We attempt to isolate two distinct effects: the portfolio effect, whereby an increase in the supply of marks must reduce the dollar/mark rate (for given expected rates of return) and the additional expectations effect, whereby intervention that is publicly known may alter investors' expectations of the future exchange rate, which will feed back to the current equilibrium price. We estimate a system consisting of two equations, one describing investors' portfolio behavior and the other their formation of expectations, where the two endogenous variables are the current spot rate and investors' expectation of the future spot rate. We use new data sources: actual daily data on intervention by the Fed, the Bundesbank, and the Swiss National Bank, newspaper stories on exchange rate policy announcements and known intervention, and survey data on investors' expectations. We find evidence of both an expectations effect and a portfolio effect. The statistical significance of the portfolio effect suggests that even sterilized intervention may have had positive effects during the sample period. For the magnitude of the effects to be large requires that intervention be publicly known.

Risk Premia in Foreign Currency Futures

Abstract: This paper tests the uncorrelatedness of increments of daily foreign currency futures prices and derives implications for risk premia based on a heteroscedasticity-robust variance ratio test. There is evidence suggesting the existence of a time-varying risk premia. Moreover, the results suggest that currency futures price is not an unbiased predictor of currency spot price on corresponding maturity date of currency futures contract. The paper also applies a heteroscedasticity-adjusted Box-Pierce Q test to the same data set for comparison.

Rational Expectations and Price Determination in the US Oats Market

Abstract: This paper develops a simultaneous rational expectations model of the US oats market Consistent estimates of the structural parameters are obtained by the instrumental variables method and 15 of 16 parameter estimates are significant at the 5 per cent level Estimated elasticities suggest that hedged stocks are more responsive to price changes than unhedged stocks, and that consumption demand for oats is more responsive to income changes than to changes in price. Post-sample forecasts of the spot price derived from this model are employed to test the semi-strong form efficient markets hypothesis (EMH), although the futures price outperforms the model as a predictor of the spot price. Hence the EMH cannot be rejected

Corners in Organized Futures Markets

Abstract: Following a concise description of organized futures markets, the traders, and some of the rules and their purposes, necessary and sufficient conditions for corners in these markets are presented. It is shown that a profitable corner depends on what happens in the cash markets from its start to its termination. Activities in the futures market are ancillary. If the supply schedules in these spot markets remain constant then corners are usually not profitable.

When Barriers to Markets Fail: Pipeline Deregulation, Spot Markets, and the Topology of the Natural Gas Market

Abstract: Until 184, Federal regulation sanctioned monopoly as the primary mechanism for distributing natural gas. Pipelines were granted protected markets and permitted to acquire and distribute gas only through long-term contracts. To buy or sell gas, users and producers had to deal with the pipeline, they could not deal directly. Gas markets failed to exit. In 1985, pipelines were given the option to become "open access" pipelines who transported gas. This change dissolved the barriers to markets and, for the first time in more than fifty years, authorized competition. In this paper, we observe and evaluate the emergence, evolution and performance of natural gas spot markets in this new environment. We discover that spot markets flourished in the absence of regulatory barriers to their existence; more than fifty spot markets came into existence and quickly replaced long-term contracts and pipelines as sources gas. The spot price evidence reveals that open access changed the topology of the pipeline network: the balkanized and disconnected network of gas markets created by regulation became more strongly connected and spot prices converged and became more correlated throughout the network. By the end of our sample period, gas markets had become liquid and informationally efficient -- demand or supply shocks are strongly damped across the network, and the price at any point contains all the information in the network. The spatially separated spot markets are now so strongly connected that they form a single national market for natural gas.

The precautionary demand for commodity stocks

Abstract: This paper develops a theory of the precautionary demand for commodity stocks. It suggests that commodity stocks are held for precautionary purposes by producers, consumers, and intermediate processors, while speculators hold stocks on the expectation of capital gains from a subsequent price rise. Producer and consumer stocks usually account for the largest share of commercial stocks held at any point in time. For example, at the end of 1990, stocks held by producers and consumers of copper were 72 percent of all commercial stocks of the market economy countries. Yet, the theory explaining the behavior of this class of stocks has not progressed much beyond the concept of convenience yield, first introduced by Kaldor (1939). This paper proposes an alternative theory. Holding of stocks by producers and consumers is viewed as precautionary behavior towards output and price risks. As a theory of behavior towards risks, the precautionary stock demand model encompasses speculative demand by both producers and consumers. Furthermore, both stocks and futures are treated as precautionary instruments, in contrast to the dichotomy that only stocks provide convenience yield while futures are hedging instruments.

A Note on Futures Markets with Small Price and Production Risks

Abstract: When the spot price and production risk are jointly normally distributed, the mean-variance approach has little theoretical justification. The authors use Taylor approximations instead and show the three results. One, farmers hedge less than expected production when the futures price is less than or equal to the expected spot price. Two, when the futures price equals the expected spot price, farmers facing production risk produce less than those without production risk. Three, normal backwardation (contango) prevails in the markets when correlation between the spot price and production risk is smaller (greater) in absolute value than the ratio of coefficients of variation of these variables. Copyright 1992 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Oil Futures and Strategic Stocks at Sea

Abstract: A theoretical model explaining the determination of prices in the markets for North Sea crude oil is set up. Three markets are analysed in a three-stage game in which market concentration increases by each stage: In the first stage, the International Petroleum Exchange is modeled as a thick futures market. This market is also used to hedge against the uncertain outcome of the 15-Day forward market, modeled in the second stage. There, a small club of traders enter futures contracts knowing that this will affect the storage decision and thereby the spot price profile. The third stage models the spot market as a two-period duopoly with inventories. The strategic effect of, and interaction between, inventories and futures positions is investigated.

The Canadian Market‐determined Bank Rate and the Bilateral Canada/US Spot Exchange Rate

Abstract: Innovations – the unanticipated component – of the Canadian market‐determined bank rate announcements have an immediate impact on the bilateral Canadian/US dollar spot exchange rate, with the sign of the impact depending on market perceptions of the monetary policy regime in which the central bank is operating. The expected bank rate changes do not have a significant impact on the spot rate. Moreover, a test of the “news” impact on the Canadian/US dollar must include the relationship between the latter and Deutschmark/ US$ spot rate, which is a proxy for the movement of the US dollar against major offshore currencies.

Profitable Currency Speculation: Service to Users or Destabilizing?

Abstract: The publications by Milton Friedman (1953) and Egon Sohmen (1961/1969) present to this day two of the most articulate and comprehensive statements of the case for flexible exchange rates. A part of this case is the proposition that in the absence of government intervention, speculators may be expected to stabilize exchange rates.

Spot Pricing of Electricity: An Appraisal of the Mit Model

Abstract: The concept of spot pricing of electricity has attracted increasing attention. Whereas conventional tariffs are set for, say, a year in advance, spot prices reflect the conditions of demand and supply as they obtain at each moment in time.

When Barriers to Markets Fail: Pipeline Deregulation, Spot Markets, and the Topology of the Natural Gas Market

Abstract: Until 184, Federal regulation sanctioned monopoly as the primary mechanism for distributing natural gas. Pipelines were granted protected markets and permitted to acquire and distribute gas only through long-term contracts. To buy or sell gas, users and producers had to deal with the pipeline, they could not deal directly. Gas markets failed to exit. In 1985, pipelines were given the option to become open access pipelines who transported gas. This change dissolved the barriers to markets and, for the first time in more than fifty years, authorized competition. In this paper, we observe and evaluate the emergence, evolution and performance of natural gas spot markets in this new environment. We discover that spot markets flourished in the absence of regulatory barriers to their existence; more than fifty spot markets came into existence and quickly replaced long-term contracts and pipelines as sources gas. The spot price evidence reveals that open access changed the topology of the pipeline network: the balkanized and disconnected network of gas markets created by regulation became more strongly connected and spot prices converged and became more correlated throughout the network. By the end of our sample period, gas markets had become liquid and informationally efficient -- demand or supply shocks are strongly damped across the network, and the price at any point contains all the information in the network. The spatially separated spot markets are now so strongly connected that they form a single national market for natural gas.

The Stability of the Purchasing Power of Money

Abstract: An entrepreneur society is one where managers use forward money contracts to hire inputs for the production process. These contracts provide entrepreneurs with the legal ability to direct the use of labour, materials and other hired inputs in producing output in that manner managers deem to be most cost effective and profitable.