Showing papers on "Spot contract published in 2005"

Stochastic Convenience Yield Implied from Commodity Futures and Interest Rates

Abstract: We characterize a three-factor model of commodity spot prices, convenience yields, and interest rates, which nests many existing specifications. The model allows convenience yields to depend on spot prices and interest rates. It also allows for time-varying risk premia. Both may induce mean reversion in spot prices, albeit with very different economic implications. Empirical results show strong evidence for spot-price level dependence in convenience yields for crude oil and copper, which implies mean reversion in prices under the risk-neutral measure. Silver, gold, and copper exhibit time variation in risk premia that implies mean reversion of prices under the physical measure.

Modeling and forecasting electricity prices with input/output hidden Markov models

Abstract: In competitive electricity markets, in addition to the uncertainty of exogenous variables such as energy demand, water inflows, and availability of generation units and fuel costs, participants are faced with the uncertainty of their competitors' behavior. The analysis of electricity price time series reflects a switching nature, related to discrete changes in competitors' strategies, which can be represented by a set of dynamic models sequenced together by a Markov chain. An input-output hidden Markov model (IOHMM) is proposed for analyzing and forecasting electricity spot prices. The model provides both good predictions in terms of accuracy as well as dynamic information about the market. In this way, different market states are identified and characterized by their more relevant explanatory variables. Moreover, a conditional probability transition matrix governs the probabilities of remaining in the same state, or changing to another, whenever a new market session is opened. The model has been successfully applied to real clearing prices in the Spanish electricity market.

Competitive Options, Supply Contracting, and Electronic Markets

Abstract: This paper develops a framework for analyzing business-to-business (B2B) transactions and supply chain management based on integrating contract procurement markets with spot markets using capacity options and forwards. The framework is motivated by the emergence of B2B exchanges in several industrial sectors to facilitate such integrated contract and spot procurement. In the framework developed, a buyer and multiple sellers may either contract for delivery in advance (the "contracting" option) or they may buy and sell some or all of their input/output in a spot market. Contract pricing involves both a reservation fee per unit of capacity and an execution fee per unit of output if capacity is called. The key question addressed is the structure of the optimal portfolios of contracting and spot market transactions for the buyer and these sellers, and the pricing thereof in market equilibrium. Existence and structure of market equilibria are characterized for the associated competitive game between sellers with heterogeneous technologies, under the assumption that they know the buyer's demand function. This allows an explicit characterization of the price of capacity options and the value of managerial flexibility, as well as providing conditions under which B2B exchanges are efficient and sustainable.

The Nature of Power Spikes: A Regime-Switch Approach

Abstract: Due to its non-storable nature, electricity is a commodity with probably the most volatile spot prices, exemplified by occasional spikes. Appropriate pricing, portfolio, and risk management models have to incorporate these characteristics, and the spikes in particular. We investigate the nature of power spikes in a number of different markets. We test what time-series model is best able to capture the dynamics of these disruptive spot prices. We use regime-switching models to infer whether the price spikes should be treated as abnormal and independent deviations from the ‘normal’ price dynamics or whether they form an integral part of the price process. We test the time-series models on day-ahead markets in Europe and the US. We find that regimeswitch models are better able to capture the market dynamics than a GARCH(1,1) or Poisson jump model. We also find clear differences between the markets and attribute part of the differences to the share of hydro-power in the total supply stack: hydro-power serves as an indirect means to store electricity, which has a dampening effect on spikes.

Commodities and commodity derivatives : modeling and pricing for agriculturals, metals and energy

Abstract: The last few years have been a watershed for the commodities, cash and derivatives industry. New regulations and products have led to an explosion in the commodities markets, creating a new asset class for investors that includes hedge funds as well as University endowments, and has resulted in a spectacular growth in spot and derivative trading. This book covers hard and soft commodities (energy, agriculture and metals) and analyses: *Economic and geopolitical issues in commodities markets *Commodity price and volume risk *Stochastic modelling of commodity spot prices and forward curves *Real options valuation and hedging of physical assets in the energy industry It is required reading for energy companies and utilities practitioners, commodity cash and derivatives traders in investment banks, the Agrifood business, Commodity Trading Advisors (CTAs) and Hedge Funds.

Modeling electricity prices with regime switching models

Abstract: We address the issue of modeling spot electricity prices with regime switching models. After reviewing the stylized facts about power markets we propose and fit various models to spot prices from the Nordic power exchange. Afterwards we assess their performance by comparing simulated and market prices.

System and method for offering a futures contract indexed to entertainment revenue

Abstract: A method of trading includes performing a transaction of a futures contract between a buyer and a seller. The futures contract is associated with at least one entertainment event and comprises a purchase price and a settlement date. The method concludes by performing a settlement of the futures contract based at least in part upon the purchase price and a value associated with the entertainment event at the settlement date. The entertainment event is associated with a security and the transaction of the futures contract is performed in conjunction with the issuance of the security to the seller.

An Approximation for Convenience Yield in Commodity Futures Pricing

Abstract: The pricing of commodity futures contracts is important both for professionals and for academics. It is often argued that futures prices include a convenience yield and this paper uses a simple trading strategy to approximate the impact of convenience yields. The approximation requires only three variables, underlying asset price volatility; futures contract price volatility and the futures contract time to maturity. The approximation is tested using spot and futures prices from the London Metals Exchange contracts for copper, lead and zinc with quarterly observations drawn from a 25-year period, 1975 to 2000. Matching Euro-Market interest rates are used to estimate the risk free rate. The convenience yield approximation is found to be both statistically and economically important in explaining variation between the futures price and the spot price after adjustment for interest rates.

The predictive content of energy futures: an update on petroleum, natural gas, heating oil and gasoline

Abstract: This paper examines the relationship between spot and futures prices for energy commodities (crude oil, gasoline, heating oil markets and natural gas). In particular, we examine whether futures prices are (1) an unbiased and/or (2) accurate predictor of subsequent spot prices. We find that while futures prices are unbiased predictors of future spot prices, with the exception those in the natural gas markets at the 3-month horizon. Futures do not appear to well predict subsequent movements in energy commodity prices, although they slightly outperform time series models.

Do Oil Futures Prices Help Predict Future Oil Prices

Abstract: The price of oil has risen by about 60% since mid-2004 and by more than 40% since the beginning of 2005. Though the U.S. economy has apparently absorbed this supply shock well so far, the path of future oil prices remains a concern for monetary policymakers. Higher oil prices can damp demand, as consumers and firms spend more of their budgets on oil-related products and less on other goods and services. Furthermore, if higher oil prices are passed through to a significant extent to other goods and services and ultimately wages, inflationary pressures can build. ; Is the price of oil likely to rise further, or will it decline gradually, as it did in the mid-1980s? A natural place to look for an answer is in the markets, where oil traders are knowledgeable about the industry and where their profits ride on making sound investments. This Economic Letter discusses how to forecast future oil price movements based on information from both the oil futures market and the spot market. In particular, we conduct a series of forecasting exercises and compare the performance of models that use oil futures and spot prices in an attempt to find the one that performs best.

Term Structure Models of Commodity Prices: A Review

Abstract: This review article describes the main contributions in the literature on term structure models of commodity prices. The first section is devoted to the theoretical analysis of the term structure. It confines itself primarily to the traditional theories of commodity prices and to their explanation of the relationship between spot and futures prices. The theories of normal backwardation and storage are however a bit limited when the whole term structure is taken into account. As a result, there is a need for a long-term extension of the analysis, and this premise constitutes the second point of the section. Finally, a dynamic analysis of the term structure is presented. The second section is centered on term structure models of commodity prices. The presentation shows that these models differ on the nature and the number of factors used to describe uncertainty. Four different factors are generally used: the spot price, the convenience yield, the interest rate, and the long-term price. The third section reviews the main empirical results obtained with term structure models. First of all, simulations highlight the influence of the assumptions concerning the stochastic process retained for the state variables and the number of state variables. Then, the method usually employed for the estimation of the parameters is explained. Lastly, the models9 performances, i.e., their ability to reproduce the term structure of commodity prices, are presented. The fourth section examines the two main applications of term structure models: hedging and valuation. The conclusion summarizes the broad trends in the literature on commodity pricing during the 1990s and early 2000s, and proposes future directions for research.

Bias and backwardation in natural gas futures prices

Abstract: This paper tests the fair-game efficient-markets hypothesis for the natural gas futures prices over the period 1990 through 2003. We find evidence consistent with the Keynesian notion of normal backwardation. Regressing the future spot prices on the lagged futures prices and using the Stock-Watson (1993) procedure to correct for the correlation between the error terms and the futures prices, we find that natural gas futures are biased predictors of the corresponding future spot prices for contracts ranging from 3 to 12 months. These results cast a serious doubt on the commonly held view that natural gas futures sell at a premium over the expected future spot prices, and that this bias is due to the systematic risk of the futures price movements represented by a negative “beta.” We also find evidence for the Samuelson effect. © 2005 Wiley Periodicals, Inc. Jrl Fut Mark 25:281–308, 2005

Mean-risk optimization of electricity portfolios using multiperiod polyhedral risk measures

Abstract: We present an applied mathematical model with stochastic input data for mean-risk optimization of electricity portfolios containing electricity futures as well as several components to satisfy a stochastic electricity demand: electricity spot market, two different types of supply contracts offered by a large power producer, and a combined heat and power production facility with limited capacity Stochasticity enters the model via uncertain electricity demand, heat demand, spot prices, and future prices The model is set up as a decision support system for a municipal power utility (price taker) and considers a medium term optimization horizon of one year in hourly discretization The objective is to maximize the expected overall revenue and, simultaneously, to minimize risk in terms of multiperiod risk measures Such risk measures take into account intermediate cash values in order to avoid uncertainty and liquidity problems at any time We compare the effect of different multiperiod risk measures taken from the class of polyhedral risk measures which was suggested in our earlier work

Premium Private Labels, Supply Contracts, Market Segmentation, and Spot Prices

Abstract: In recent years, European retailers have modified the market segmentation in the meat and the fresh produce sectors by implementing new private labels which aim to guarantee higher quality and food safety. As a result, retailers impose more demanding production requirements and rely on contractual relationships with upstream producers. Meat and vegetables shelve spaces are now composed of generic products supplied from competitive spot markets, and premium private labels based on long term supply contracts. In this paper we propose a model of vertical relationships between producers and retailers in order to analyze the consequences of such strategies. In particular, we analyze the interest of producers to commit to these new private labels, their effects on spot market prices, and the resulting market segmentation between the spot market and supply contracts.

Regional Comparisons, Spatial Aggregation, and Asymmetry of Price Pass-Through in U.S. Gasoline Markets

Abstract: Spot to retail price pass-through behavior of the U.S. gasoline market was investigated at the national and regional levels, using weekly wholesale and retail motor gasoline prices from January 2000 to the present. Asymmetric pass-through was found across all regions, with faster pass-through when prices are rising. Pass-through patterns, in terms of speed and time for completion, were found to vary from region to region. Spatial aggregation was investigated at the national level and the East Coast with the aggregated cumulative pass-through being greater than the volume-weighted regional pass-through when spot prices increase. These results are useful to the petroleum industry, consumers, and policy makers by providing a basis to estimate the retail price effects that result from a change in spot price.

Testing Efficiency of the Copper Futures Market: New Evidence from London Metal Exchange

Abstract: This paper investigates the joint hypothesis of market efficiency and unbiasedness of futures prices for the copper futures contract traded on the London Metal Exchange. This contract is of particular importance given the usage and properties of the underlying commodity and its highest share of trading during the last decade, in an exchange which is the centre of the world's trading in copper. The data contain prices from two different copper futures contracts (three and fifteen months maturity) covering the decade of 1990s, a very volatile and turbulent period for the copper market worldwide. Unlike previous studies, it tests for both long-run and short-run efficiency using cointegration and error correction model. Our results show that the market is not efficient and do not provide unbiased estimates of future copper spot prices, which has important implications for the users of this market.

Treasury Management Model with Foreign Exchange Exposure

Abstract: In this paper we formulate a model for foreign exchange exposure management and (international) cash management taking into consideration random fluctuations of exchange rates. A vector error correction model (VECM) is used to predict the random behaviour of the forward as well as spot rates connecting dollar and sterling. A two-stage stochastic programming (TWOSP) decision model is formulated using these random parameter values. This model computes currency hedging strategies, which provide rolling decisions of how much forward contracts should be bought and how much should be liquidated. The model decisions are investigated through ex post simulation and backtesting in which value at risk (VaR) for alternative decisions are computed. The investigation (a) shows that there is a considerable improvement to "spot only" strategy, (b) provides insight into how these decisions are made and (c) also validates the performance of this model.

The Predictive Content of Energy Futures: An Update on Petroleum, Natural Gas, Heating Oil and Gasoline

Abstract: This paper examines the relationship between spot and futures prices for energy commodities (crude oil, gasoline, heating oil markets and natural gas). In particular, we examine whether futures prices are (1) an unbiased and/or (2) accurate predictor of subsequent spot prices. We find that while futures prices are unbiased predictors of future spot prices, with the exception those in the natural gas markets at the 3-month horizon. Futures do not appear to well predict subsequent movements in energy commodity prices, although they slightly outperform time series models.

Cournot Equilibrium in Price-Capped Two-Settlement Electricity Markets

Abstract: We compare two alternative mechanisms for capping prices in two-settlement electricity markets. With sufficient lead time and competitive entry opportunities, forward market prices are implicitly capped by competitive pressure of potential entry that will occur when forward prices rise above a certain level. Another more direct approach is to cap spot prices through regulatory intervention. In this paper we explore the implications of the two alternative mechanisms in a two settlement Cournot equilibrium framework. We formulate the market equilibrium as a stochastic equilibrium problem with equilibrium constraints (EPEC) capturing congestion effects, probabilistic contingencies and market power. As an illustrative test case we use the 53-bus Belgian electricity network with representative generator cost but hypothetical demand and ownership assumptions. When compared to two-settlement systems without price caps we find that either of the price capping alternatives results in reduced forward contracting. Furthermore the reduction in spot prices due to forward contracting is smaller.

Implications of Commodity Price Behavior for Marketing Strategies

Abstract: Prices of agricultural commodities have systematic, dynamic components, and many agricultural economists have thought that forecasts of this behavior ought to aid marketing decisions, thereby raising producers' returns. But, if commodity markets are pricing efficient, then noncompetitive profit opportunities should be quickly arbitraged away. Thus, a debate exists about the magnitude of the likely benefits of various marketing strategies. Herein we address the question, what does the literature about commodity price behavior contribute to our understanding of the expected outcomes from alternative marketing strategies? Our brief answer is as follows. Spot prices in U.S. commodity markets typically behave in a way that is consistent with efficient markets; systematic behavior persists because of the costs of arbitrage. Hence, price forecasts in the public domain cannot be used to produce returns which are consistently above the competitive norm, although low-cost strategies to manage price risk exist. Evaluating the evidence on these topics is not easy, however, because the price generating processes are complex. Sometimes prices seem to behave as if a market is inefficient. Advice based on analyses using short samples should be used with great caution. The remainder of the article elaborates:

Henry Hub and National Balancing Point Prices: What will be the International Gas Price Reference?

Abstract: One of the lessons in the history of international trade in commodities is the emergence - sooner or later - of an international price reference, most commonly known as an international marker price. In the area of oil, West Texas Intermediate (WTI) plays the role of a marker for sour crudes traded in the Atlantic basin. Brent oil fulfils this function for sweet crudes traded in Europe. Another important aspect in the area of global commodities is that the emergence of a marker price is not always necessarily related to the relative share of production or exports of the commodity, but primarily to the existence of an organized market for this commodity. Today, while international gas trade is intensifying, we still lack an international price reference for this commodity. This is due to the fact that the international trade of natural gas is still highly regionalized. It is also due to the fact that most gas markets are still regulated. Nevertheless, deregulation efforts have been implemented in both developed (the United States, the United Kingdom, continental Europe, Korea) and developing countries (Brazil, Chile) and have led to new market structures based on more competition in all segments of the gas chain, except transportation. In the meantime, price structures based on supply and demand principles are supposed to have emerged in the US and UK markets in the 1990s as a result of the implementation of deregulation measures. Today, the US gas market, which represents more than 660 billion cubic metres per year of consumption and the UK gas market, which is close to 100 bcm annually, are considered mature enough to make the principles of supply and demand operate inside these markets. In fact, the Henry Hub (HH) price, which is determined at a physical location in Louisiana, US, and the national balancing point (NBP) price, which is determined somewhere inside the national transmission system (NTS), without any precise location, are considered as potential candidates to serve as a marker price in the international trade of gas. The objective of this paper is to examine some fundamental properties of the HH and NBP prices and assess which of them has the biggest potential to become an international price reference. Our main conclusions are: 1. According to the relatively huge volume of gas traded on the US spot market, compared with the UK, and according to the experience accumulated by the New York Mercantile Exchange (NYMEX) in gas trading, the HH price has a bigger potential than the NBP to become an international price reference, particularly because the UK market is supposed to import more and more gas indexed to oil in the coming years. 2. However, on the price fluctuation side, the NBP spot price seems to fluctuate more normally than the HH price in the short term, which can give a certain advantage to NBP prices. 3. We cannot exclude the fact that in the coming years we will have two or even more reference prices in the Atlantic Basin: the NBP, the HH and also reference prices at other regional hubs.

Futures versus univariate forecast of crude oil prices

Abstract: A simple univariate model is employed to generate an unbiased and (weakly) efficient forecast of the crude oil spot price. In terms of predictive information, however, this univariate forecast is inferior to the futures price for one-month-ahead contracts. This observation may suggest that the futures price of crude oil, while unbiased, tends to be semi-strongly efficient.

Do oil futures prices help predict future oil prices

Abstract: The price of oil has risen by about 60% since mid-2004 and by more than 40% since the beginning of 2005. Though the U.S. economy has apparently absorbed this supply shock well so far, the path of future oil prices remains a concern for monetary policymakers. Higher oil prices can damp demand, as consumers and firms spend more of their budgets on oil-related products and less on other goods and services. Furthermore, if higher oil prices are passed through to a significant extent to other goods and services and ultimately wages, inflationary pressures can build. ; Is the price of oil likely to rise further, or will it decline gradually, as it did in the mid-1980s? A natural place to look for an answer is in the markets, where oil traders are knowledgeable about the industry and where their profits ride on making sound investments. This Economic Letter discusses how to forecast future oil price movements based on information from both the oil futures market and the spot market. In particular, we conduct a series of forecasting exercises and compare the performance of models that use oil futures and spot prices in an attempt to find the one that performs best.

Long‐term and short‐term contract in a mixed market*

Abstract: With a two-period mixed oligopolistic framework, this paper analyses the interaction between the length of incentive contracts and market behaviour. Assuming an environment in which firms choose either a long-term or short-term contract, we examine how contracts differ between public and private firms. The results show that the contracts would differ completely among firms; public firm prefers to make a short-term contract while private firm makes a long-term contract.