Showing papers on "Spot contract published in 2003"

The electricity contract market in England and Wales

Abstract: In England and Wales, wholesale electricity is sold in a spot market partly covered by long-term contracts which hedge the spot price. Two dominant conventional generators can raise spot prices well above marginal costs, and this is profitable in the absence of contracts. If fully hedged, however, the generators lose their incentive to raise prices above marginal costs. Competition in the contract market could lead the generators to sell contracts for much of their output. Since privatisation the generators have indeed covered most of their sales in the contract market.

Modeling electricity prices: jump diffusion and regime switching

Abstract: In this paper we address the issue of modeling spot electricity prices. After summarizing the stylized facts about spot electricity prices, we review a number of models proposed in the literature. Afterwards we fit a jump diffusion and a regime switching model to spot prices from the Nordic power exchange and discuss the pros and cons of each one.

Accuracy and Forecast Standard Error of Prediction Markets

Abstract: Prediction markets” are designed specifically to forecast events. Though such markets have been conduced for more than a decade, to date there is no analysis of their long-run predictive properties. We provide the first systematic evidence on the long-run predictive power of these markets by studying ex post accuracy and means of measuring ex ante forecast standard errors. Ex post, prediction markets prove accurate at long and short forecasting horizons, in absolute terms and relative to natural alternative forecasts. We use efficient markets theory and some special properties of the markets to develop forecast standard errors. Both time series and inter-market pricing relationships suggest that markets generate efficient random walks in prices. Thus, random walk projections generate reasonable confidence intervals. These confidence intervals differ dramatically from margins of error quoted in polls. We argue this is reasonable because polls do not attempt to, nor can they be expected to, measure the degree of uncertainty about the eventual election outcome conditional on their own results. In contrast, the markets incorporate this uncertainty by design. Accuracy and Forecast Standard Error of Prediction Markets “Prediction markets” are designed and conducted for the primary purpose of aggregating information so that market prices forecast future events. These markets differ from typical, naturally occurring markets in their primary role as a forecasting tool instead of a resource allocation mechanism. For example, since 1988, faculty at the Henry B. Tippie College of Business at the University of Iowa have been running markets through the Iowa Electronic Markets (IEM) project that are designed to predict election outcomes. These represent the longest running set of prediction markets known to us. They have proven efficient in forecasting the evening and week before elections. However, no analysis of their long-run forecasting power has been conducted. Here, we analyze these markets to show how prediction markets in general can serve as efficient mechanisms for aggregating information and forecasting events that can prove difficult for traditional forecasting methods. We put special focus on longer-run properties. Existing evidence (e.g., Berg, Forsythe, Nelson and Rietz, 2003, and references cited therein) shows excellent ex-post predictive accuracy for election prediction markets in the very short run (i.e., one-day-ahead forecasts using election eve prices). While this is an interesting and important result, it does not address the critical question of whether prediction markets can serve as effective long-run forecasting tools (weeks or months in advance). Here, we present the first systematic analysis of election market data on two additional properties that are important for evaluating their long-run efficacy. The first property we study is the longer-run predictive accuracy of markets relative to their natural competitors: polls. This analysis provides the first documented evidence that prediction markets are considerably more accurate long-run forecasting tools than polls across elections and across long periods of time preceding elections (instead of just on election-eve). The second property we study is the forecast standard error of market predictions. This allows us to have a (previously unavailable) measure of confidence in ex-ante market predictions. We study three means of measuring forecast Since 1993, these markets have expanded to predict many other types of events including other political outcomes, financial and accounting outcomes for companies, national and international economic phenomena, box office receipts for movies, etc. 2 standard errors. First, we show the difficulty in applying a previously developed structural model designed to explain short-run, ex post accuracy to out-of-sample data. Second, we show that the time series of forecasts from our prediction markets are consistent with efficient market random walks. From this, one can construct forecast standard errors. Third, we show that an efficient inter-market pricing relationship can be exploited to the same end. These estimated forecast standard errors appear somewhat larger, but are not significantly different from the random walk approach. We suggest that both should be used to get a reasonable estimate of forecast standard errors and confidence intervals for prediction markets. I. Prediction Markets Since Hayek (1945), economists have recognized that markets have a dual role. They allocate resources and, through the process of price discovery, they aggregate information about the values of these resources. The information aggregation role of some markets seems particularly apparent. For example, corporations cite the value of their stock as the consensus judgment of their owners about the value of the corporation’s activities. Increasingly, corporations reward managers based on this value measure. Futures and options markets aggregate information about the anticipated future values of stocks and commodities. If it is true that futures prices are the best predictors of actual future spot prices (as the “expectations hypothesis” asserts), then futures prices constitute forecasts. For example, Krueger and Kuttner (1996) discuss how the Federal Funds futures contract can be used to predict future Federal Funds rates and, hence, future Federal Reserve target rates. In most markets, if prediction uses arise, they do so as a secondary information aggregation role. However, some recent markets have been designed specifically to exploit their information aggregation Debate over the ability of futures markets to forecast future prices extends back to Keynes (1930) and Hicks (1946). Many of the arguments result from the secondary nature of information aggregation in these markets. The early “normal backwardization” versus “contago effect” arguments were based on relative power of speculators and hedgers. Today, the idea that “risk neutral” probabilities used to price futures and options differ from the “true” underlying probabilities result from relative levels of hedging demand in the markets. While the IEM markets discussed below may be subject to price deviations due to hedging activities, the narrow scope of the IEM markets, the small size of investments and analysis of individual traders (e.g., Forsythe, Nelson, Neumann and Wright, 1992, and Forsythe, Rietz and Ross, 1999) all lead us to conclude that hedging activities do not affect IEM prices significantly.

Dealing with Derivatives. Studies on the role, informational content and pricing of financial derivatives

Abstract: The aim of this thesis is to improve the understanding of derivatives markets, which should ultimately lead to a better diversification of risks among market participants. The author first analyzes the impact of derivatives on the market quality of the underlying asset. With experiments and a theoretical model it is shown that derivatives generally make markets more efficient, although volatility may increase, depending on the exact market structure. Next, the author presents two methods that derive information about the underlying price process from traded options. The models approximate the option prices well and the extracted information explains future volatility better than historical data. Finally, a model for the valuation of options in electricity markets is presented that deals with the special characteristics of electricity spot prices and may serve to value electricity generation plants.

Equilibrium Forward Contracts on Nonstorable Commodities in the Presence of Market Power

Abstract: Bilateral supply contracts are widely used despite the presence of spot markets. In this paper we provide a potential explanation for this prevalence of supply contracts even when spot markets are liquid and without delivery lag. Specifically, we consider the determination of an equilibrium forward contract on a nonstorable commodity between two firms that have mean-variance preferences over their risky profits and negotiate the forward contract through a Nash bargaining process. We derive the unique equilibrium forward in closed form and provide an extensive analysis of the equilibrium contract. We show that it is the risk hedging benefit from a forward that justifies its prevalence in spite of liquid spot markets. In addition, while a forward does not affect production decisions due to the presence of spot markets, it does affect inventory decisions of the storable input factor due to its hedging effect against the inventory risk. We also show that price volatilities and correlations are important determinants of the equilibrium contract. In particular, the equilibrium forward price can be nonmonotonic in the spot price volatility and can decrease as the initial spot price increases.

Price Discovery, Causality and Forecasting in the Freight Futures Market

Abstract: This paper investigates the causal relationship between futures and spot prices in the freight futures market. Being a thinly traded market whose underlying asset is a service, sets it apart from other markets investigated so far in the literature. Causality tests, generalised impulse response analysis and forecasting performance evaluation indicate that futures prices tend to discover new information more rapidly than spot prices. Revisions in the composition of the underlying index to make it more homogeneous, have strengthened the price discovery role of futures prices. The information incorporated in futures prices, when formulated as a VECM, produces more accurate forecasts of spot prices than the VAR, ARIMA and random-walk models, over several steps ahead.

How Much Of Commodity Price Behavior Can A Rational Expectations Storage Model Explain

Abstract: A rational expectations competitive storage model is applied to the U.S. corn market to assess the aptness of this framework in explaining monthly price behavior in an actual commodity market. Relative to previous models, extensive realism is added to the model in terms of how production activities and storage costs are specified. By modeling convenience yield, "backwardation" in prices between crop years does not depend on the unrealistic assumption of zero ending stocks. Our model produces cash prices that are distributed with positive skewness and kurtosis, and mean and variance that increase over the storage season, consistent with the persistence and the occasional spikes observed in commodity prices. Futures prices are generated as conditional expectations of spot prices at contract maturity, and the variances of futures prices have realistic time-to-maturity and seasonal patterns. Model realizations of cash and futures prices over many "years" are used to demonstrate the wide variety of price behaviors that can be observed in an efficient market with a similar market structure, implying that marketing strategies based on short, historical samples of prices to manage price risk can be misleading.

Futures and spot prices - an analysis of the Scandinavian electricity market : Proceedings of the 34th Annual North American power Symposium (NAPS 2002); Tempa AZ- USA, October 2002.

Abstract: Futures and spot prices - an analysis of the Scandinavian electricity market : Proceedings of the 34th Annual North American power Symposium (NAPS 2002); Tempa AZ- USA, October 2002.

Optimal hedging under departures from the cost-of-carry valuation: Evidence from the Spanish stock index futures market

Abstract: We provide an analytical discussion of the optimal hedge ratio under discrepancies between the futures market price and its theoretical valuation according to the cost-of-carry model Assuming a geometric Brownian motion for spot prices, we model mispricing as a speci…c noise component in the dynamics of futures market prices Empirical evidence on the model is provided for the Spanish stock index futures Ex-ante simulations with actual data reveal that hedge ratios that take into account the estimated, time-varying, correlation between the common and speci…c disturbances, lead to using a lower number of futures contracts than under a systematic unit ratio, without generally losing hedging e¤ectiveness, while reducing transaction costs and capital requirements Besides, the reduction in the number of contracts can be substantial over some periods Finally, a meanvariance expected utility function suggests that the economic bene…ts from an optimal hedge are substantial

Optimal Contract Design: For Whom?

Abstract: In designing a derivative contract, an exchange carefully considers how its attributes affect the expected profits of its members. On November 3, 1997, the Chicago Mercantile Exchange doubled its tick size of its S&P 500 futures contract and halved the denomination, providing a rare opportunity to examine empirically the search for an optimal contract design. This article measures changes in the trading environment that occurred in the days surrounding the contract redesign. We find a discernible change in the incidence of price clustering, an increase in the bid/ask spread, a reduction in trading volume, and no meaningful change in dollar trade size. These results suggest that the contract redesign did not increase accessibility but did increase market maker revenue. Despite the increase, however, the bid/ask spread of the S&P 500 futures contract remains low relative to the costs of market making and the spreads in markets for competing instruments. © 2003 Wiley Periodicals, Inc. Jrl Fut Mark 23:719–750, 2003

Supplier-Manufacturer Relationships Under Forced Compliance Contracts

Abstract: Today, many retailers are adopting lean strategies to improve efficiency (see Abernathy et al. 1999). Manufacturers that supply lean retailers must fulfill orders accurately, rapidly, and efficiently, despite demand volatility, by appropriately structuring their production and transportation processes. The outsourcing of transportation has become common; in this case a contract might be struck that specifies how much capacity a logistics provider guarantees to the manufacturer. Given that the demand for transportation services varies day by day in the “lean-retailer” context, the contract must take into account the manufacturer’s risk of not fulfilling the retailer’s demand if the transportation requirements exceed the agreed upon capacity and the logistics provider’s risk of not using all of the committed capacity. The use of electronic spot markets for transportation has become prevalent and offers one means to mitigate these risks—the transportation provider can sell unused capacity while the manufacturer can secure additional transportation services when the logistics provider’s promised capacity is insufficient. In this paper we analyze a contract in this context and its capability to mitigate the effects of demand and spot-price uncertainties, as well as how each party, and the supply chain in total, benefits from the contract. We analyze a contract for options for nonstorable products or services, such as transportation, between a single supplier and a single manufacturer in the presence of a spot market, where the supplier has limited capacity and the manufacturer must fulfill periodic stochastic demand from a downstream supplychain link, such as a lean retailer, in full. We assume that the quantity of goods desired by the manufacturer is always available on the spot market at some price, that the spot-market price is exogenous, and that neither the supplier nor buyer is of sufficient size to have a perceptible effect on it. We model our problem as a two-stage Stackelberg game in which the supplier is the leader. At stage one, the supplier offers the manufacturer a contract for options with a reservation price and an exercise price. In response, the manufacturer purchases a certain number of options from the supplier, after which the supplier determines the total quantity of goods or services to make available to the manufacturer or the spot market. At the beginning of the second stage, demand and spot price are realized. After observing this information, the manufacturer decides how many options to exercise with the supplier and how much to purchase on the spot market. The manufacturer can view the spot market as an alternative source of the product: If the spot market price is below the supplier’s exercise price, then the manufacturer buys only from the spot market; otherwise, she buys from the spot market only if the reserved capacity is insufficient to satisfy the demand in full. After the manufacturer’s order is filled, we assume that the supplier can sell all his excess inventory to the spot market at some price, which may or may not be profitable. We assess the effectiveness of such a contract in coordinating the channel, how the optimal policies are set, and how the value of the contract is shared between the parties. Several papers analyze whether forward options can coordinate the channel and ensure incentive compatibility for both players, or whether additional

Wholesale Spot Price Pass-Through

Abstract: It has been proposed that, when electricity markets open to retail competition, incumbent distribution utilities should be required to sell to residential customers at wholesale spot market prices. It is argued here that this overestimates the value of spot-price sales to customers, and underestimates the costs and disadvantages of the proposed policy. Experience in San Diego illustrates the problems. But other policies such as “shopping credits” have deficiencies too. An alternative approach, based on transitional maximum price caps, has facilitated the development of a competitive and fully deregulated residential retail market in the United Kingdom.

A fuzzy-neural approach to electricity load and spot-price forecasting in a deregulated electricity market

Abstract: Accurate short term load forecasting is crucial to the efficient and economic operation of modem electrical power systems. With the recent effort by many governments in the development of open and deregulated power markets, research in forecasting methods is getting renewed attention. Although long term and short term electric load forecasting has been of interest to the practicing engineers and researchers for many years, spot-price prediction is a relatively new research area. This paper examines the use of a neural-fuzzy inference method for the prediction of 24 hourly load and spot price for the next day. Publicly available data of the electricity market of the state of New South Wales, Australia is used in a case study.

Price discovery function of forward contracts in the real estate market: an empirical test

Abstract: Studies on the pricing of financial forward contracts are abundant, and massively outnumber those on the pricing of real forward contracts due to the scarcity of data in the real forward contracts market. In addition, most real forward contracts markets are thinly transacted and heterogeneous in nature. The property pre-sales market is a major real forward contract market in Hong Kong that has been actively transacted. The large volume of data in the Hong Kong property pre-sales market allows us to construct and test a forward contracts pricing model for properties. Despite the relative higher information cost in the real forward contracts compared to financial future contracts, we found that uncompleted properties in the pre-sales market are efficiently priced and accurately reflect the spot price level and the discount due to rental income forgone during the preoccupation period. We also found that the expected spot price derived from our forward pricing model tracks the ex post spot price closely.

Periodic Heteroskedastic RegARFIMA for daily electricity spot prices

Abstract: Although the main interest in the modelling of electricity prices is often on volatility aspects, we argue that stochastic heteroskedastic behaviour in prices can only be modelled correctly when the conditional mean of the time series is properly modelled. In this paper we consider different periodic extensions of regression models with autoregressive fractionally integrated moving average disturbances for the analysis of daily spot prices of electricity. We show that day-of-the-week periodicity and long memory are important determinants for the dynamic modelling of the conditional mean of electricity spot prices. Once an effective description of the conditional mean of spot prices is empirically identified, focus can be directed towards volatility features of the time series. For the older electricity market of Nord Pool in Norway, it is found that a long memory model with periodic coefficients is required to model daily spot prices effectively. Further, strong evidence of conditional heteroskedasticity is found in the mean corrected Nord Pool series. For daily prices at three emerging electricity markets that we consider (APX in The Netherlands, EEX in Germany and Powernext in France) periodicity in the autoregressive coefficients is also established, but evidence of long memory is not found and existence of dynamic behaviour in the variance of the spot prices is less pronounced. The novel findings in this paper can have important consequences for the modelling and forecasting of mean and variance functions of spot prices for electricity and associated contingent assets.

Method and apparatus for deriving benchmarks for trading instruments

Abstract: Benchmarks for the price of a financial instrument such as FX spot rate for a currency pair are calculated by an algorithm based on a previous benchmark and a market price. The market price is derived from a deal price and a quote price. The deal price is based on deals conducted since the last benchmark and the quote price is based on bids and offers entered since the last benchmark. For each of the deal and quote prices, a price, weight and scatter is calculated which is used to calculate a benchmark price, weight and scatter and a benchmark error.

Monetizing a contract to supply a commodity

Abstract: A method of monetizing a contract to supply a commodity from a supplier to a recipient is disclosed. According to one embodiment, the method includes transferring the contract to a first entity and revising the contract such that the first entity may provide the commodity to the recipient from sources other than specified in the contract. The method further includes establishing a second contract to supply the commodity from the second entity to the first entity, wherein the price of the commodity in the second contract is less than the price of the commodity in the revised first contract. In addition, the method includes guaranteeing, by a third-party guarantor, payment obligations of the first entity to the recipient arising out of the revised first contract and/or payment obligations of the second entity to the first entity arising out of the second contract. Additionally, the method includes offering debt securities from the first entity and paying, from the first entity to the supplier, proceeds from the offering for transfer of the contract to the first entity. Further, the method may include sufficiently funding a reserve account of the first entity to include funds to cover the debt service on the debt securities for a predetermined time period.

Monetary Policy Delegation, Contract Costs, and Contract Targets

Abstract: We reconsider the optimal central banker contract derived in Walsh (1995). We show that if the government's objective function places weight (value) on the cost of the contract, then the optimal inflation contract does not completely neutralize the inflation bias. That is, a fraction of the inflation bias emerges in the resulting inflation rate after the central banker's monetary policy decision. Furthermore, the more concerned the government is about the cost of the contract or the less selfish (more benevolent) is the central banker, the smaller is the share of the inflation bias eliminated by the contract. No matter how concerned the government is about the cost of the contract or how unselfish (benevolent) the central banker is, the contract always reduces the inflationary bias by at least half. Finally, a central banker contract written in terms of output (i.e., incorporating an output target) can completely eradicate the inflationary bias, regardless of concerns about contract costs.

Method and system for trading a foreign exchange swap certificate

Abstract: A novel method, system and computer readable medium are provided which effectively executes underlying transactions of an inventive financial instrument having a foreign exchange swap component and an investment component. The swap component includes a spot transaction and a forward transaction while the short term investment component includes investing the money resulting from the spot transaction in an investment, such as in a money market or bond investment. Three different financial instruments/certificates are provided to offer different returns based on different expectations of interest rates and, in particular, of changes in the differential between the interest rates of two selected currencies.

Price Discovery in Private Negotiation Trading with Forward and Spot Deliveries

Abstract: Advance production in spot markets increases seller costs because inventories must be held. This cost does not exist in production-to-demand (or forward) markets, for which production follows trading, and sales exactly match quantities produced. Data from laboratory-computerized markets that trade through private negotiation are analyzed. For the experimental supply and demand conditions, price convergence patterns show spot prices 10.8% lower and the number of trades 12.4% fewer than forward outcomes. The adverse impact of advance production and private negotiation on seller earnings is emphasized when earnings are compared with those from double auction trading.

A multivariate GARCH analysis of the domestic transmission of energy commodity prices and volatility: A comparison of the peak and off-peak periods in the Australian electricity spot market

Abstract: This paper examines the transmission of spot electricity prices and price volatility among the five Australian electricity markets in the National Electricity Market (NEM): namely, New South Wales (NSW), Queensland (QLD), South Australia (SA), Snowy Mountains Hydroelectric Scheme (SNO) and Victoria (VIC). A multivariate generalised autoregressive conditional heteroskedasticity (MGARCH) model is used to identify the source and magnitude of innovations and spillovers. The results indicate the inability of the existing network of interconnectors to create a substantially integrated national electricity market and that, for the most part, the sizeable differences in peak and off-peak spot prices between most of the regions will remain, at least in the short term. However, own-volatility and cross-volatility spillovers are significant for nearly all markets, indicating the presence of strong ARCH and GARCH effects. Strong own and cross-persistent volatility are also evident in all Australian regional electricity markets. This indicates that while the limited nature of the interconnectors between the separate regional spot markets prevents full integration of these markets, shocks or innovations in particular markets still exert an influence on price volatility.

Short-term electricity price forecasting using wavelet and SVM techniques

Abstract: In deregulated electricity market, modeling and forecasting the spot price present a number of challenges. By applying wavelet and support vector machine techniques, a new time series model for short term electricity price forecasting has been developed in this paper. The model employs both historical price and other important information, such as load capacity and weather (temperature), to forecast the price of one or more time steps ahead. The developed model has been evaluated with the actual data from Australian National Electricity Market. The simulation results demonstrated that the forecast model is capable of forecasting the electricity price with a reasonable forecasting accuracy.

Enhanced premium equity participating securities

Abstract: A financial unit is disclosed According to one embodiment the unit includes a fixed income security and a forward purchase contract The fixed income security may include a maturity date, a principal amount and an interest amount The forward purchase contract may obligate a holder of the forward purchase contract to purchase a quantity of equity securities of an issuer of the unit for a price equal to the stated amount of the unit no later than a settlement date specified in the forward purchase contract In addition, the forward purchase contract may further obligate the issuer of the unit to pay a purchaser of the unit a forward purchase contract payment at issuance of the unit and possibly additional forward contract payments after issuance

Zero premium equity participating securities

Abstract: A unit, such as a unit structured mandatory convertible security, is disclosed. The unit may have a stated amount. According to one embodiment, the unit may include a fixed income security and a forward purchase contract, which are separable. The fixed income security may have a principal amount, a maturity date and an interest rate. The forward purchase contract may obligate a holder of the forward purchase contract to purchase a quantity of equity securities from an issuer of the unit at a settlement price no later than a settlement date specified in the forward purchase contract. The quantity of equity securities to be purchased by the holder may be determined by dividing the stated amount of the unit by the market price of the equity securities at the date the unit is issued.

The effectiveness of coordinating price limits across futures and spot markets

Abstract: We extend the work of Brennan (1986) to investigate whether the imposition of spot price limits can further reduce the default risk and lower the effective margin requirement for a futures contract that is already under price limits. Our results show that spot price limits do indeed further reduce the default risk and margin requirement effectively. In addition, the more precise the information is that comes from the spot market, the more the spot price limit rule constrains the information available to the losing party. The default probability, contract costs, and margin requirements are then lowered to a greater degree. Furthermore, for a given margin, both spot price limits and futures price limits can partially substitute for each other in ensuring contract performance. The common practice of imposing equal price limits on both the spot and futures markets, though not coinciding with the efficient contract design, has a lower contract cost and margin requirement than that without imposing spot price limits. © 2003 Wiley Periodicals, Inc. Jrl Fut Mark 23:577–602, 2003