Showing papers on "Spot contract published in 1999"

Method, system, and computer program product for trading interest rate swaps

Abstract: A method, system, computer program product, and data structure for trading in which a standardized contract is traded The contract obligates a buyer and a seller (two of the customers 12, 14, and 16) to settle the contract based on a price of the contract at a first effective date The contract is traded through an exchange that guarantees payment to the buyer of any amount owed to the buyer from the seller as a result of the contract and that guarantees payment to the seller of any amount owed to the seller from the buyer as a result of the contract The price of the contract is determined based on preselected notional cash flows discounted by an interest rate swap curve obtained from a preselected swap rate source (18)

The relationship between spot and futures prices: Evidence from the crude oil market

Abstract: This article examines the relationship between the spot and futures prices of WTI crude oil using a sample of daily data. Linear causality testing reveals that futures prices lead spot prices, but nonlinear causality testing reveals a bidirectional effect. This result suggests that both spot and futures markets react simultaneously to new information. © 1999 John Wiley & Sons, Inc. Jrl Fut Mark 19: 175–193, 1999

Equilibrium Pricing and Optimal Hedging in Electricity Forward Markets

Abstract: Electricity cannot be economically stored, leading to volatile spot prices and implying that standard cost-of-carry relations are not useful for pricing electricity forward contracts. We model spot and forward power markets, evaluating the demand for risk reduction and assessing equilibrium spot and forward power prices. We obtain the implication that the forward price will contain a risk premium that depends on both the variance and the skewness of spot electricity demand. We show that power-producing firms' optimal forward market positions depend on forecast output and on the skewness of power demand. Power retailing firms' optimal forward positions depend on forecast usage, and on two statistical measures of interrelations between local and system demand that we refer to as power betas, and the coskewness of local power demand with system-wide demand. We use available data on electricity futures and spot delivery prices to provide preliminary empirical evidence that is generally consistent with our predictions.

The relative efficiency of commodity futures markets

Abstract: The ability of futures markets to predict subsequent spot prices has been a controversial topic for a number of years. Empirical evidence to date is mixed; for any given market, some studies find evidence of efficiency, others of inefficiency. In part, these apparently conflicting findings reflect differences in the time periods analyzed and the methods chosen for testing. A limitation of existing tests is the classification of markets as either efficient or inefficient with no assessment of the degree to which efficiency is present. This article presents tests for unbiasedness and efficiency across a range of commodity and financial futures markets, using a cointegration methodology, and develops a measure of relative efficiency. In general, the findings suggest that spot and futures prices are cointegrated with a slope coefficient that is close to unity, so that the postulated long-run relationship is accepted. However, there is evidence that the long-run relationship does not hold in the short run; specifically, changes in the spot price are explained by lagged differences in spot and futures prices as well as by the basis. This suggests that market inefficiencies exist in the sense that past information can be used by agents to predict spot price movements. A measure of the relative degree of inefficiency (based on forecast error variances) is then used to compare the performance of different markets. © 1999 John Wiley & Sons, Inc. Jrl Fut Mark 19: 413–432, 1999

Trading system for fixed-value contracts

Abstract: A trading system for the trading of fixed-value contracts employs a novel form of contract that has a fixed face value and two sides that respectively represent mutually exclusive outcomes. Traders submit bids specifying a selected “side” of the contract, a price, and a contract quantity specification, for matching with complementary bids submitted for the opposing “side” of the contract, thereupon occasioning “filled” trades. Upon the termination of the contract in accordance with pre-established criteria, resulting in the determination of a prevailing side of the contract, holders of filled contracts whose bid specified the prevailing “side” of the contract receive the face value of the contract. The trading system of the invention is preferably implemented In computerized embodiments that enable traders to submit bids to a host computer over a network, and said host computer provides traders with access to all pertinent trading information in real time, automatically matches complementary bids, and enables the immediate clearing and settlement of all filled trades from deposit accounts established by traders using the system.

The forward pricing function of the shipping freight futures market

Abstract: This article investigates the unbiasedness hypothesis of futures prices in the freight futures market. Being the only market whose underlying asset is a service, it sets it apart from other markets investigated so far in the literature. Cointegration techniques, employed to examine this hypothesis, indicate that futures prices one and two months before maturity are unbiased forecasts of the realized spot prices, whereas a bias exists in the three-months futures prices. This mixed evidence is in agreement with studies in other markets and suggests that the acceptance or rejection of unbiasedness depends on the idiosyncrasies of the market under investigation and on the time to maturity of the contract. Despite the existence of a bias in the three-months prices, futures prices for all maturities are found to provide forecasts of the realized spot prices that are superior to forecasts generated from error correction, ARIMA, exponential smoothing, and random walk models. Hence it appears that users of the BIFFEX market receive accurate signals from the futures prices (regarding the future course of cash prices) and can use the information generated by these prices to guide their physical market decisions. © 1999 John Wiley & Sons, Inc. Jrl Fut Mark 19: 353–376, 1999

Phenomenology of the interest rate curve

Abstract: The paper contains a phenomenological description of the whole US forward rate curve (FRC), based on data in the period 1990–1996. It is found that the average deviation of the FRC from the spot rate grows as the square-root of the maturity, with a prefactor which is comparable to the spot rate volatility. This suggests that forward rate market prices include a risk premium, comparable to the probable changes of the spot rate between now and maturity, which can be understood as a ‘Value-at-Risk’ type of pricing. The instantaneous FRC, however, departs from a simple square-root law. The deformation is maximum around one year, and reflects the market anticipation of a local trend on the spot rate. This anticipated trend is shown to be calibrated on the past behaviour of the spot itself. It is shown that this is consistent with the volatility ‘hump’ around one year found by several authors (which is confirmed). Finally, the number of independent components needed to interpret most of the FRC fluctuations is ...

Self-Enforcing Transactions: Reciprocal Exposure in Fisheries

Abstract: This article tests the importance of transaction-specific investments in determining contract choice in the intermediate market for raw fish. The analysis uses information from a large sample of (implicit) contracts between fishers and processors in British Columbia for the 1988 fishing season. These contracts are of two general types: spot-market arrangements, and ex ante agreements. With a spot contract, buyers and sellers of fish seek one another after incurring seasonal investments (e.g., vessel maintenance, crew, processing facilities, etc.); there is no prior agreement for exchange, nor is there an agreement the relationship will continue beyond the transaction.' With ex ante agreements, the parties agree to trade with one another, perhaps exclusively, prior to either party incurring seasonal start-up costs. These agreements typically have nonprice compensation mechanisms such as financing of vessels by processors, and

Is the Australian wool futures market efficient as a predictor of spot prices

Abstract: Giles and Goss (1980) have suggested that, if a futures market provides a forward pricing function, then it is an efficient market. In this article a simple test for whether the Australian Wool Futures market is efficient is proposed. The test is based on applying cointegration techniques to test the Law of One Price over a three, six, nine, and twelve month spread of futures prices. We found that the futures market is efficient for up to a six-month spread, but no further into the future. Because futures market prices can be used to predict spot prices up to six months in advance, woolgrowers can use the futures price to assess when they market their clip, but not for longer-term production planning decisions. (C) 1999 John Wiley & Sons, Inc.

Electronic Screen Trading and the Transmission of Information: An Empirical Examination

Abstract: We examine the lead-lag relation between intraday spot and futures prices for stock index where the component stocks are floor traded while the futures contract is screen traded. We find that futures prices lead spot prices by nearly 20 minutes. This is much longer than in markets where both the index and index futures are floor traded. We show that this lead-lag relation is unlikely to be an artifact of differences in liquidity between spot and future markets. These results are consistent with the hypothesis that screen trading accelerates the price discovery process.

An Application of Bayesian Option Pricing to the Soybean Market

Abstract: Options pricing techniques have been an important part of finance for some time. Mostapproaches specify a particular stochastic process to represent the price dynamics of theunderlying asset and then derive an explicit pricing model. While this may be acceptablefor standard financial assets, it can be problematic for commodities. Many commoditieshave significant seasonalities and require a far more elaborate time-series specification ofthe price dynamics of the underlying asset. Hence, it becomes difficult at best to deriveexplicit pricing formulae. Further, with the additional complexity of a rich time-seriesspecification, estimation risk becomes a genuine concern.In this paper we suggest an alternative approach. We use numerical Bayestechniques to build a predictive density for the price of the underlying asset (for theexample in this paper we need to predict the soybean cash and futures prices at theoption’s expiration). Bayesian techniques allow for two very important additions. First, wecan integrate out any estimation risk. Second, it allows us to incorporate properly anynon-sample information that we may have. Once the predictive density has beencomputed, we use a procedure proposed by Stutzer (1996) to translate this density to itsrisk-neutral form. Once this is done, pricing European options is very straightforward.To illustrate this approach we consider recent prices of options on soybean futurestraded on The Chicago Board of Trade. We start with a simple vector autoregressivespecification of the spot price return and the basis (defined as the log difference betweenthe futures price and the spot price). We compare this procedure with traditionalapproaches as well as with a non-parametric procedure advocated by Stutzer (1996).

Interest rate differentials, market integration, and the efficiency of commodity futures markets

Abstract: Tests for the efficiency of commodity arbitrage typically fail to find cointegration relationships between spot and futures prices and between markets. The reported study investigates the issue for spot and futures prices of cocoa on New York and London markets by means of the Johansen maximum likelihood approach adding interest rates as conditioning variables. The results indicate that interest rates may play an important role in establishing the hypothesized relationships. It is further found that futures prices Granger-cause spot prices, but not vice versa. This is interpreted as evidence for spot prices reacting slowly to new information.

Combining financial double call options with real options for early curtailment of electricity service

Abstract: In a competitive electricity market, traditional demand side management options offering customers curtailable service at reduced rates are replaced by voluntary customer responses to electricity spot prices. In this new environment, customers wishing to ensure a fixed electricity price while taking advantage of their flexibility to curtail loads can do so by purchasing a forward electricity contract bundled with a financial option that provides a hedge against price risk and reflects the "real options" available to the customer. The paper describes a particular financial instrument referred to as a "double call" option and derives the value of that option under the assumption that forward electricity prices behave as a geometric Brownian motion process. It is shown that a forward contract bundled with an appropriate double call option provides a "perfect hedge" for customers that can curtail loads in response to high spot prices and can mitigate their curtailment losses when the curtailment decision is made with sufficient lead time.

Less of a puzzle: a new look at the forward forex market

Abstract: The two-country monetary model is extended to include a consumption externality with habit persistence. This is set within a limited participation framework. The model is simulated using the artificial economy methodology. The 'puzzles' in the forward market are re-examined. The model is able to account for (a) the low volatility of the forward discount (b) the higher volatility of expected forward speculative profits (c) the even higher volatility of spot rate changes (d) the persistence in the forward discount and (e) the random walk in spot exchange rates The major innovation is that it is able to replicate some of the extent of the bias of the forward discount as a predictor of realised spot rate changes.

An Empirical Model of Inventory Investment by Durable Commodity Intermediaries

Abstract: This paper introduces a new detailed data set of high-frequency observations on inventory investment by a U.S. steel wholesaler. Our analysis of these data leads to six main conclusions: orders and sales are made infrequently; orders are more volatile than sales; order sizes vary considerably; there is substantial high-frequency variation in the firm's sales prices; inventory/sales ratios are unstable; and there are occasional stockouts. We model the firm generically as a durable commodity intermediary that engages in commodity price speculation. We demonstrate that the firm's inventory investment behavior at the product level is well approximated by an optimal trading strategy from the solution to a nonlinear dynamic programming problem with two continuous state variables and one continuous control variable that is subject to frequently binding inequality constraints. We show that the optimal trading strategy is a generalized (S,s) rule. That is, whenever the firm's inventory level q falls below the order threshold s(p) the firm places an order of size S(p) - q in order to attain a target inventory level S(p) satisfying S(p) >= s(p), where p is the current spot price at which the firm can purchase unlimited amounts of the commodity after incurring a fixed order cost K. We show that the (S,s) bands are decreasing functions of p, capturing the basic intuition of commodity price speculation, namely, that it is optimal for the firm to hold higher inventories when the spot price is low than when it is high in order to profit from "buying low and selling high." We simulate a calibrated version of this model and show that the simulated data exhibit the key features of inventory investment we observe in the data.

The Supply of Storage under Heterogeneous Expectations

Abstract: Expected prices for storable commodities often lie below spot prices plus interest and marginal storage charges. Recently this gap has been explained as the value of a call option held by a representative storer whenever a positive probability exists that stocks could dwindle to zero. However, the probability of an aggregate stock-out is effectively zero in most markets most of the time. This paper presents an alternative model that explains the gap as an equilibrium between fundamentals traders and noise traders. Applications of the model suggest that rational agents make up 84 percent of the U.S. copper market, and more than 95 percent of the corn and wheat markets.

Testing the efficiency of the south african futures market for white maize / toetsing van die doeltreffendheid van die suid-afrikaanse termynkontrakmark vir witmielies

Abstract: Cointegration analysis is used to test whether the South African futures market for white maize was efficient (futures prices predict spot (cash) prices that reflect all publicly available information) in 1997 and 1998. Tests are also conducted to assess whether or not white maize futures prices are unbiased predictors of future spot prices (for effective price discovery). There was no long-run relationship between white maize futures and spot prices for 1997, but there is evidence of a long-run relationship between these price series in 1998. Furthermore, the 1998 futures price was an unbiased predictor of future spot prices for both the annual and three-month contract. This could be evidence of a market learning process and a progression towards efficiency, which has seen a marked increase in market liquidity (contract volumes traded) since late 1996.

Day-of-week effects in tests of forward foreign exchange rate unbiasedness

Abstract: The day of the week on which the forward rate is quoted and the day of the week on which the corresponding one-period ahead spot rate matched to the delivery date of the forward contract is quoted may play a systematic role in the empirical estimates of the coefficient on the forward premium in tests of forward foreign exchange rate unbiasedness. These ‘day-of-week’ effects are motivated from an inventory carrying cost argument as in Bessembinder (1994) and introduced into a simple model for forward foreign exchange market efficiency. Empirical results show that the point estimates are generally consistent with the hypotheses; however, large standard errors make discriminatory power weak and conclusions regarding the role of inventory carrying costs in the magnitude of the forward premium bias debatable. Copyright © 1999 John Wiley & Sons, Ltd.

Testing the efficiency of the south african futures market for white maize

Abstract: Cointegration analysis is used to test whether the South African futures market for white maize was efficient (futures prices predict spot (cash) prices that reflect all publicly available information) in 1997 and 1998. Tests are also conducted to assess whether or not white maize futures prices are unbiased predictors of future spot prices (for effective price discovery). There was no long-run relationship between white maize futures and spot prices for 1997, but there is evidence of a long-run relationship between these price series in 1998. Furthermore, the 1998 futures price was an unbiased predictor of future spot prices for both the annual and three-month contract. This could be evidence of a market learning process and a progression towards efficiency, which has seen a marked increase in market liquidity (contract volumes traded) since late 1996.

Non‐storables, Simultaneity and Price Determination: The Australian (Finished) Live Cattle Market

Abstract: Empirical studies of simultaneous rational expectations (RE) models of spot and futures markets for non-storable commodities, such as finished live cattle, are rare. Indeed, only two countries, the US and Australia, have produced data sets for the study of such markets. This paper develops, and presents estimates of a simultaneous RE model of the live cattle market in Australia, the world's leading beef exporting country. The model contains functional relationships for short hedgers and short speculators, long hedgers and long speculators, and consumers, and is completed with a spot price equation and market clearing identity. Augmented Dickey-Fuller and Phillips-Perron tests for unit roots are executed, and Johansen cointegration tests are employed to investigate whether the I(1) variables are cointegrated. Structural equations are estimated by maximum likelihood when ARCH effects are present, by instrumental variables in the absence of serial correlation, and by non-linear least squares when a correction for autocorrelation is required. The estimates of all structural parameters are significant at the five per cent level. Post-sample, the model forecasts spot and futures prices with per cent RMSE's of 4.4 per cent and 2.5 per cent, respectively. In forecasting the spot price, the model outperforms but not significantly, a random walk, an ARIMA model, and a lagged futures price as a predictor of the spot price. The outcome of this last comparison implies that the efficient markets hypothesis cannot be rejected.

Tests of non-linearity using LIFFE futures transactions price data

Abstract: This paper presents and implements a number of tests for non-linear dependence and a test for chaos using transactions prices on three LIFFE futures contracts: the Short Sterling interest rate contract, the Long Gilt government bond contract, and the FTSE 100 stock index futures contract. While previous studies of high frequency futures market data use only those transactions which involve a price change, we use all of the transaction prices on these contracts whether they involve a price change or not. Our results indicate irrefutable evidence of non-linearity in two of the three contracts, although we find no evidence of a chaotic process in any of the series. We are also able to provide some indications of the effect of the duration of the trading day on the degree of non-linearity of the underlying contract. The trading day for the Long Gilt contract was extended in August 1994, and prior to this date there is no evidence of any structure in the return series. However, after the extension of the trading day we do find evidence of a non-linear return structure.