Topic
Spot contract
About: Spot contract is a research topic. Over the lifetime, 3437 publications have been published within this topic receiving 91599 citations.
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TL;DR: In this paper, the authors used singular perturbation theory to obtain approximate closed-form pricing equations for forward contracts and options on single and two-name forward prices, based on a fast mean-reverting stochastic volatility driving factor and leading to pricing results in terms of constant volatility prices.
Abstract: It is well known that stochastic volatility is an essential feature of commodity spot prices. By using methods of singular perturbation theory, we obtain approximate but explicit closed‐form pricing equations for forward contracts and options on single‐ and two‐name forward prices. The expansion methodology is based on a fast mean‐reverting stochastic volatility driving factor and leads to pricing results in terms of constant volatility prices, their Deltas and their Delta‐Gammas. Both the standard single‐factor mean‐reverting spot model and a two‐factor generalization, in which the long‐run mean is itself mean‐reverting, are extended to include stochastic volatility and each is analysed in detail. The stochastic volatility corrections can be used to efficiently calibrate option prices and compute sensitivities.
50 citations
TL;DR: In this article, a new stylized fact regarding the dynamics of the commodity convenience yield was revealed: the volatility of the convenience yield is heteroskedastic for industrial commodities; specifically, the volatility (variance) depends on the convenience yields level.
50 citations
TL;DR: This paper examined a more extensive set of futures contracts than previous studies and analyzed each contract separately, finding that the maturity effect is absent in the majority of contracts and that negative covariance between the spot price and net carry cost causes the maturity effects in futures.
50 citations
TL;DR: In this paper, the effect of the maturity of the futures contract used as the hedging instrument on the effectiveness of futures hedging was examined and it was shown that hedging is more effective when the near-month contract is used.
Abstract: This article examines the effect of the maturity of the futures conract used as the hedging instrument on the effectiveness of futures hedging. For this purpose, daily and monthly data on the West Texas Intermediate (WTI) crude oil futures and spot prices are used to work out the hedge ratios and the measures of hedging effectiveness resulting from using the near-month contract and those resulting from the use of a more distant (6-month) contract. The results show that futures hedging is more effective when the near-month contract is used. They also reveal that hedge ratios are lower for near-month hedging. Some explanations are presented for these findings.
50 citations
TL;DR: The Chicago Mercantile Exchange doubled the 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.
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
50 citations