Showing papers on "Spot contract published in 1994"

Open Access and the Evolution of the U. S. Spot Market for Natural Gas

Abstract: Federal regulations promoting open-access transportation dramatically altered the organizational structure of the U.S. market for natural gas in the 1980s, generally unbundling the merchant and transport functions of interstate pipelines. An empirical analysis of wellhead spot prices is undertaken to examine the effect of open access on the geographic scope of the spot market. Using monthly spot price data from 1984-91, three statistical tests are applied and compared: price correlations, Granger causality, and cointegration. We find that open access integrated the regional wellhead markets into a national competitive market for natural gas. The effects of unbundling on contracts for natural gas are then investigated. Incentives for long-term contracts between pipelines and producers are shown to be effectively removed by the introduction of competitive buying and selling of gas at the wellhead through open access.

Cointegration and market efficiency in commodities futures markets

Abstract: The hypothesis that futures prices are unbiased predictors of spot prices is a joint hypothesis that markets are efficient and risk premia are absent. Rejection of unbiasedness could be caused by the failure of either premise. Here cointegration techniques are used to test market efficiency while permitting the presence of risk premia. Five commodity markets were tested at the eight and twenty-four week horizon. Results showed that all five were sometimes inefficient but no market was inefficient always. Moreover, rejections of the unbiasedness hypothesis were nearly always caused by market inefficiency rather than the presence of risk premia.

Optional forward contracts for electric power markets

Abstract: This paper extends the idea of callable forward contracts, which are potentially useful as demand-side (interruptible-load) contracts, to their supply-side analogues. Together, these contracts allow market participants to take advantage of flexibility in generation or consumption to obtain a monetary benefit, while simultaneously removing the risk of market price fluctuations. This paper also considers the effects of strategic behavior on the part of market participants in their contract sales/purchase decisions. >

Price Convergence Across Natural Gas Fields and City Markets

Abstract: This research reports the results of cointegration tests between natural gas spot prices at various production fields, pipeline hubs, and city markets. Cointegration between prices is evidence that spatial arbitrage is enforcing the law of one price across market locations. The results show that prices at certain city markets, Chicago and to a lesser extent California, are cointegrated with prices in field markets. However, the prices at most other locations do not move in step with gas prices in the field markets. Customer access to pipeline transportation, or competitive bypass, may explain why prices at some city markets are more responsive to production field prices than others. 15 refs., 2 tabs.

Distributed spot pricing in radial distribution systems

Abstract: Spot pricing is a method for pricing electricity that maximizes the economic efficiency of the power system. The authors derive an expression for the spot prices in a radial distribution system, in terms of system quantities such as power line flows. The system's radial structure leads to simplified spot price expressions. They do not assume that all the problem data is available at one location (i.e. to the utility). The proposed pricing algorithm addresses the issue of decentralized knowledge by using a distributed processing scheme, which emphasizes local computations. They also show how line flow constraints can be implemented as an integral part of the proposed spot pricing algorithm. >

The use of New York cotton futures contracts to hedge cotton price risk in developing countries

Abstract: Cotton exports account for a significant share of commodity exports for some developing countries, especially in West Africa and Central Asia. In these countries, dependency on cotton for export revenues has increased in the past 20 years. These countries therefore have a high exposure to cotton price volatility. Cotton-producing developing countries and economies in transition make little use of hedging mechanisms to reduce risk from the volatility of cotton export revenues. Countries in Francophone West Africa use forward sales to hedge but only for a small share of the crop. These countries could use cotton futures and options contracts to hedge against short- to medium-term price volatility, making cotton export revenues more predictable. Cotton futures and options contracts could also make cotton-related commercial transactions more flexible. (Futures could be sold when there are no buyers in the physical market, for example.) In West Africa, futures and options could complement the existing system of forward sales. The authors examine the feasibility of using New York cotton futures and options contracts as hedging instruments. They base their analysis on a portfolio selection problem in which the hedger selects the optimal proportions of unhedged and hedged output to minimize risk. The results suggest that despite the existence of relatively high basis risk (that is, a relatively low correlation between spot and future prices), hedging reduces cotton price volatility by 30 to 70 percent. Moreover, for all varieties of cotton examined, the hedge ratio (the percentage of exports hedged) was below one. Using a hedge ratio of one (naive hedge), at times, increases rather than decreases risk. The results also show that hedging, while reducing risk, also reduces expected returns. Attitudes toward risk that is, the degree of risk aversion - determine how much of this risk-return tradeoff is acceptable. For a risk-averse agent, the main benefit of hedging lies in risk reduction rather than in the potential for increased returns.

The Impact of Futures Trading on the Spot Market for Treasury Bonds

Abstract: Critics of futures markets contend that futures trading destabilizes spot prices and raises price levels of the underlying treasury bonds, while the proponents claim that futures trading improves the information content and stability of spot prices. To investigate these conflicting viewpoints, this paper examines the price behavior of treasury bonds at three critical time points: a) as they enter, retain, and exit the cheapest-to-deliver status; b) as they approach the futures delivery date; and, c) as they cease to be deliverable. An empirical analysis based on a rich data set of daily bond prices over thirty-four delivery quarters reveals little support for the critics’ view of futures trading.

Default, market microstructure, and changing trade patterns in forward markets: A case study of North-Sea oil

Abstract: Default (or credit) risk is a central difference between forward and futures markets. Empirical tests have found little difference between forwards and futures prices, but these tests have been conducted on markets where such risk is minimal (e.g., foreign exchange), so that even if default risk is in general an important difference between forward and futures trading, they would have been unable to detect its effects. In contrast, this paper presents a case study of a market, for forward delivery of a type of crude oil from the North Sea, that experienced widespread and well-documented defaults when the spot price of the underlying commodity plunged from roughly $30 to roughly $10 per barrel in a short period of time in early 1986. The defaults were by relatively small, lightly-capitalized trading companies, firms that neither produce nor consume the physical commodity. Because information on defaults in financial markets is scarce, the paper describes the circumstances surrounding the default episode in some detail. The market survived the default episode with market microstructure unaltered, and still flourishes, despite the successful introduction of a futures market in the same commodity by the (London) International Petroleum Exchange. Patterns of trade changed, however. The paper examines the hypothesis that investment banks, which entered the market following the default period, provided intermediation services to market participants, thereby substituting to an extent for a clearinghouse. Taking advantage of the information on the buyer and seller in each transaction, the paper presents nonparametric tests for changing patterns of forward trade.

The Demise of the High Fructose Corn Syrup Contract: A Case Study

Abstract: This paper focuses on the HFCS-55 industry and pricing practices, and the principal factors causing the demise of the HFCS-55 futures contract, which traded on the Minneapolis Grain Exchange between April 1987 and December 1988. Consideration is given to factors that promote and inhibit the success of a futures contract. Results from a survey of producers and commercial users of HFCS-55 are presented, and cash and futures market data are analyzed. Results suggest that if a contract is not well designed, or if there is little commercial demand for it, these failings will be quickly revealed in the futures market.

Default Risk Exposure in Foreign Exchange Rate Derivatives

Abstract: High volumes of transactions and volatility in foreign exchange rate markets during 1992 and 1993 have raised concerns about the robustness of the global financial system. The volume of foreign currency transactions has increased dramatically and presently exceeds one trillion US dollars in settlements each day. In a recent survey European bankers forecasted increasingly volatile (foreign) exchange rates, implying that risks in these markets will increase towards year 2000 [1]. Beyond trading required to help the functioning of an orderly market and to stabilize exchange rates, central bankers are increasingly participating in foreign currency trading with the purpose of generating revenues. This further contributes to higher volume and volatility.

When to Use Currency Swaps

Abstract: In this paper, different uses of currency swaps will be discussed. One of the uses relates to possible cost reduction or yield enhancement, which may be realized when swapping to a lower interest currency. But in such a case it is uncertain whether a profit will actually be realized, as this depends on the exchange rate development. Therefore, it is more interesting to have some information about the variance of the expected profit. In this paper a method is presented to determine both the expected profit and its variance. Examples are given for specific currency swaps, involving the US dollar, the Swiss franc and the main EMS-currencies.