Spot contract

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

Energy spot price models and spread options pricing

Abstract: In this article, we construct forward price curves and value a class of two asset exchange options for energy commodities. We model the spot prices using an affine two-factor mean-reverting process with and without jumps. Within this modeling framework, we obtain closed form results for the forward prices in terms of elementary functions. Through measure changes induced by the forward price process, we further obtain closed form pricing equations for spread options on the forward prices. For completeness, we address both an Actuarial and a risk-neutral approach to the valuation problem. Finally, we provide a calibration procedure and calibrate our model to the NYMEX Light Sweet Crude Oil spot and futures data, allowing us to extract the implied market prices of risk for this commodity.

Rational Expectations and Risk Premia in Forward Markets: Primary Metals at the London Metals Exchange

Abstract: This paper tests whether forward prices equal the traders' expectations of the future spot prices at maturity, under two different models of expectations formation: full information rational expectations and incomplete information mechanical forecasting rule. The tests are performed, over the period January 1970 through September 1980, on the forward markets for the primary metals-copper, tin, lead, and zinc-traded in the London Metals Exchange. We find evidence consistent with the existence of time varying risk premia. THE WAY IN WHICH traders form expectations about future price is of great interest to economists as well as to market participants, and forward prices have often been used as indicators of these otherwise unobservable expectations. Forward prices, however, include not only the expectation of future spot prices but also a component reflecting the riskiness of the contract. Therefore, the risk premium can be defined as the difference between the forward price and the expected future spot at the maturity date of the forward contract.' There is a longstanding debate on the nature of this risk premium. The HicksKeynes view2 is that in futures markets speculators provide insurance against the risk of fluctuations in the price of the spot commodity, and hedgers pay a premium for this risk transfer in the way of a forward price that is higher than the expected spot price. In other words the risk premium should be positive.3 Hardy [11] has suggested, however, that a future market is merely a casino in which speculators can participate in a legalized form of gambling. For this privilege they have to pay a price in the form of a negative expected return, thus resulting in a negative risk premium.4