Spot contract

About: Spot contract is a research topic. Over the lifetime, 3437 publications have been published within this topic receiving 91599 citations.

Modeling electricity spot prices: combining mean reversion, spikes, and stochastic volatility

Abstract: Starting with the liberalization of electricity trading, this market grew rapidly over the last decade. However, while spot and future markets are rather liquid nowadays, option trading is still limited. One of the potential reasons for this is that the spot price process of electricity is still puzzling researchers and practitioners. In this paper, we propose an approach to model spot prices that combines mean-reversion, spikes and stochastic volatility. Thereby we use dierent mean-reversion rates for "normal" and "extreme" (spike) periods. Another feature of the model is its ability to capture correlation structures of electricity price spikes. Furthermore, all model parameters can easily be estimated with help of historical data. Consequently, we argue that this model does not only extend academic literature on electricity spot price modeling, but is also suitable for practical purposes, e.g. as underlying price model for option pricing.

Forward and futures prices with bubbles

Abstract: This paper extends and refines the Jarrow et al. (2006, 2008) arbitrage free pricing theory for bubbles to characterize forward and futures prices. Some new insights are obtained in this regard. In particular, we: (i) provide a canonical process for asset price bubbles suitable for empirical estimation, (ii) discuss new methods to test empirically for asset price bubbles using both spot prices and call/put option prices on the spot commodity, (iii) show that futures prices can have bubbles independent of the underlying asset's price bubble, (iv) relate forward and futures prices under bubbles, and (v) relate price options on futures with asset price bubbles.

Short Selling, Unwinding, and Mispricing

Abstract: This paper highlights the impact of short selling restrictions and early unwinding opportunities on the relation between futures and| spot prices. Within a multiperiod equilibrium model, the influence of optimal arbitrage trading on the mispricing is analyzed. Among| others, optimal arbitrage trading is shown to lead to path dependent mispricing and persistent undervaluation of futures contracts. The hypotheses of the model are tested using intraday data. Results concerning level, mean reversion and path dependence of the mispricing are provided. The empirical evidence suggests that short selling restrictions and early unwinding opportunities are very influential factors for the mispricing behavior.

Forward Versus Spot Buying of Information Goods

Abstract: Several information goods, such as movie distribution rights or newspapers, are sold either at spot prices, or through forward subscription buying. Our paper considers a firm that offers an information good through spot buying, forward buying at a reduced price, or a combination of the two. The time lag between forward buying and spot buying brings about an uncertainty in a consumer's reservation price for the good at the time of advance purchase. We propose a consumer decision-making model that captures this fundamental feature and provides interesting insights into the key elements of consumer behavior. We establish that a consumer offered the choice between forward buying and waiting to (possibly) buy the good on spot faces the tradeoff between a lower unit price and the value of updated preferences. We also establish that consumers preferring forward buying have a relatively high expectation and low uncertainty in their reservation prices for the good at the time of advance purchase, while those preferring spot buying have a relatively low expectation and high uncertainty in their reservation prices for the good. We apply the model to formulate and analyze the firm’s problem when it is either a price taker or a price setter. When the firm is a price taker, the choice is whether to offer the good for only forward buying, only spot buying, or a combination of the two. With an example, we show that when both the spot price and the discount on forward buying are moderate in values, the seller chooses the mixed strategy of offering both forward and spot buying simultaneously. When the firm is a price setter, the goal is to choose the offering(s) and the price level(s). With the example, we show how firms selling information goods can increase their revenues by using a mixed offering strategy with both spot and forward offerings. This strategy lends itself to second-degree price discrimination by the seller when there are groups of customers potentially heterogeneous in terms of the distribution of their reservation prices. Our work takes significant importance in the context of information goods, which are becoming increasingly prominent and are being delivered on the Web through the mechanisms of forward and spot buying.

The forward exchange rate and the prediction of the future spot rate: Empirical evidence

Abstract: This paper examines the characteristics and evaluates the record of the forward exchange rate as a predictor of the future spot rate of three European currencies during the recent period of floating rates. The forward rate (for 1, 3 and 6 months) is compared to a simple predictor of ‘no change’ extrapolations (i.e., a Martingale model) by the use of Theil's inequality ratios. Theil's measures are then applied to assess the relative importance of the various sources of the forward's prediction errors, and the efficiency of the forecast is tested. The results show that the forward rate, while generally producing unbiased forecasts, fails to track the fluctuations in future spot rates and poorly reflects their variations. Further, it does not perform better than the current spot rate in predicting the future spot rate for all the examined forecast leads. Thus its usefulness for the purpose of business decisions is questioned.