Multi-period dual-sourcing replenishment problem with option contracts and a spot market

2018 ◽  
Vol 118 (4) ◽  
pp. 782-805 ◽  
Author(s):  
Nana Wan ◽  
Xu Chen
Keyword(s):  
Wholesale Price ◽  
Price Volatility ◽  
Spot Market ◽  
Approximate Algorithm ◽  
Spot Price ◽  
Stochastic Dynamic ◽  
Operational Strategies ◽  
Content Type ◽  
Option Contracts ◽  
Replenishment Policy

Purpose The spot market has been gradually recognized as an important alternative purchasing source. To maintain a flexible replenishment strategy, call, put and bidirectional option contracts, as a risk hedging, are in combined usage with the spot market, respectively. The purpose of this paper is to analyze a finite-horizon replenishment problem with option contracts in the context of a spot market. Design/methodology/approach Based on stochastic dynamic programming, the firm’s optimal replenishment policy with either call, put or bidirectional option contracts is always shown to be order-up-to type, characterized by an upper threshold and a lower one. The corresponding policy parameters in different cases are calculated through an approximate algorithm. This research highlights the effectiveness of option contracts on the firm’s operational strategies and overall profitability. Findings This study reveals that the firm is better off with option contracts than without them. When the price parameters are the same for different option contracts, bidirectional option contracts are the best choice among these flexible contracts; otherwise, unilateral option contracts might be either better or worse than bidirectional ones. In addition, if low inventory costs and high spot price volatility are confronted, the firm prefers to call option contracts rather than put ones; otherwise, there exists an opposite conclusion. Originality/value In addition to highlight the advantage of option contracts over wholesale price contracts, this paper provides interesting observations with respect to the effect of different option contracts on the firm. Many significant insights derived from this research do not only contribute to the provider’s feasible design of the supply contracts, but also contribute to the user’s rational operational strategies for higher profitability.

Impact of special regime generation management on electricity prices: the Portuguese case

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Carlos Francisco Alves ◽  
Pedro Diogo Pinto
Keyword(s):  
Negative Impact ◽  
Generalized Method Of Moments ◽  
Wholesale Price ◽  
Spot Market ◽  
Spot Price ◽  
Renewable Electricity ◽  
Electricity Prices ◽  
Content Type ◽  
Ex Post ◽  
The Impact

Purpose The ex-post literature, which evaluates the real impact of renewable generation, is scarce. Most studies are simulations and therefore are not based on real data. This study aims to further this goal using a unique database of the Portuguese spot market, where there are powerful incentives for renewable electricity. Design/methodology/approach This paper analyses ex-post the impact of energy produced in special regime on the wholesale hourly spot market prices of Portuguese electricity during the period 2009–2016. This paper uses standard, two stage least squares and generalized method of moments multivariate regressions and other energy econometrics techniques. Findings It is found that special regime generation has a negative impact on the wholesale price. This impact is higher than that found in other markets. This paper also concludes that using special regime generation to supply the future growth of demand will decrease wholesale electricity spot prices more intensively than using other technologies. Originality/value This paper uses a unique database based on ex-post for the Portuguese spot market. The Portuguese case is particularly interesting, not only because of its strong incentives policy on renewable energy but also because its spot market is interconnected with the Spanish market. This paper contributes to the debate about the sustainability of current renewable electricity support schemes. The decreasing trend in electricity prices, with the introduction of new renewable capacity, can be incompatible with the required payments for non-renewable producers. This paper also shows that even if the price reduction on spot markets is transferred to final consumers, given that it is relatively small (8% spot price which represents 45% of the final price), compared with the cost of incentives (35% of the final price), consumers probably will not be able to support a new investment pipeline with a similar framework.

Strategic procurement from forward contract and spot market

2014 ◽  
Vol 114 (5) ◽  
pp. 778-796 ◽  
Author(s):  
C.K.M. Lee ◽  
Danping Lin ◽  
Rohan Pasari
Keyword(s):  
Demand Uncertainty ◽  
Price Volatility ◽  
Real Data ◽  
Spot Market ◽  
Spot Price ◽  
Content Type ◽  
Procurement Process ◽  
The Impact ◽  
Forward Contracting

Purpose – The purpose of this paper is to formulate procurement strategies and determine the optimal procurement quantity in order to maximize profit through forward contracting and the spot market. Design/methodology/approach – The procurement process is modeled at various stages along a time horizon from the perspective of the buyer, with consideration of uncertain yields, stochastic demand and dynamic spot market prices. Monte Carlo simulation based experiments were conducted to figure out the best procurement quantity for five different scenarios. The framework was developed to understand the impact of different uncertain variables on a firm's profit. A case study was carried out in a steel making company in India, with real data. Findings – The results indicate that the proposed approach enables buyers to achieve higher profits under volatile demand conditions. In the case study, it was found that the profit is higher for the spot market than for contract pricing if there is significant demand and spot price volatility. Originality/value – This research considers not only demand uncertainty but also supply uncertainty in the procurement process, and profit analysis was carried out to enable an enterprise to set up a procurement plan by using forward contracting and the spot market. This study should also increase awareness in both academia and industry on the opportunities of using the spot market to enhance flexibility and to mitigate risk in the procurement process.

Is Chinese or American maize price effective for trading and policy-making reference?

2014 ◽  
Vol 6 (3) ◽  
pp. 470-484
Author(s):  
Yunxian Yan ◽  
Lu Tian ◽  
Yuejie Zhang
Keyword(s):  
Policy Making ◽  
Wholesale Price ◽  
Price Transmission ◽  
Spot Price ◽  
Policy Makers ◽  
Content Type ◽  
Market Participants ◽  
Long Run ◽  
American Maize ◽  
Futures Price

Purpose – The purpose of this paper is to discover an effective maize price for trading and policy-making reference by assessing the price transmission of the US spot and futures maize prices to Chinese counterparts. Design/methodology/approach – The authors apply a systematic, quantitative method to analyze the integration between US and Chinese maize markets. Based on the residuals of the variables through error correction model, the directed acyclic graph (DAG) among six price variables is conducted. With consideration of the dependence on and direction of six price variables, the variance decomposition of each variable is calculated. Findings – This paper shows that the vertical price transmission passes from wholesale price to farm-gate price. The horizontal price transmission ranges from spot price to futures price at the domestic market and from the American spot price to domestic spot price, from the American spot price to domestic futures price and from the American futures price to domestic futures price. The American maize spot and futures prices, and in particular the spot price, have greater effects on domestic maize prices contemporaneously. It also indicates that the American spot price is the leader price in the long run at both maize markets. Originality/value – This paper contributes by using the DAG method in this paper. It also contributes by helping policy makers and market participants find the leading prices and offers insight into ways of gaining power of price setting in the maize market.

scholarly journals The Impact of Futures Price Volatility to Spot Market : Case of Coffee in Indonesia

2019 ◽  
Vol 15 (1) ◽  
pp. 1-15 ◽  
Author(s):  
Anis Erma Wulandari ◽  
Harianto Harianto ◽  
Bustanul Arifin ◽  
Heny K Suwarsinah
Keyword(s):  
Exchange Rate ◽  
Price Volatility ◽  
Spot Market ◽  
Futures Market ◽  
Spot Price ◽  
Price Risk ◽  
Price Inflation ◽  
Spot Prices ◽  
Futures Price ◽  
The Impact

Indonesia is the world 4th largest coffee producer after Brazil, Vietnam and Colombia with export potential and higher national consumption concluded in 2017 while the coffee production was relatively stagnant. This was led the producer to not only the production risk but also the price risk which then emphasize the importance of futures markets existence as price risk management. This study is performed to examine the impact of futures price volatility to spot market using ARCH-GARCH toward primary data of coffee futures and spot prices of 1172 trading days starting from January 2014 to June 2018. The ARCH-GARCH analysis result indicates that futures price volatility and monetary variables are impacting the volatility of spot price. Arabica spot price volatility is impacted by volatility of Arabica futures price, inflation and exchange rate while Robusta spot price is impacted by Robusta futures price volatility and exchange rate. This is confirming that futures market plays dominant role in spot price discovery. Local futures and spot prices are also found to be significantly influenced by volatility of offshore futures prices which indicates that emerging country futures market is actually influenced by offshore futures market which the price itself used as price reference.

The Effect of Futures Trading on Spot Market Liquidity

2005 ◽  
Vol 13 (1) ◽  
pp. 29-52
Author(s):  
Ki Yool Ohk
Keyword(s):  
Price Volatility ◽  
Spot Market ◽  
Market Liquidity ◽  
Stock Index ◽  
Spot Price ◽  
Spot Markets ◽  
Stock Index Futures ◽  
Trading Activity ◽  
Futures Trading ◽  
Index Futures

This study analyzes the effect of stock index futures trading on the price volatility and liquidity of spot markets, It is found that spot price volatility increases significantly after stock index futures are listed, This study partitions the trading activity series of sPOt markets into expected and unexpected components, and documents that unexpected spot-trading activities are associated with smaller sPOt price movements subsequent to the introduction of futures trading, This imolies that spot market liquidity has been increased by the intraduction of futures trading, Furthermore, this study examines the effect of futures-trading activity on the liquidity of spot markets, Results show that active futures markets enhance the liquidity of soot markets.

Impact of futures trading on volatility of spot market-a case of guar seed

2015 ◽  
Vol 75 (3) ◽  
pp. 416-431 ◽  
Author(s):  
Dinesh Kumar Sharma ◽  
Meenakshi Malhotra
Keyword(s):  
Trading Volume ◽  
Price Volatility ◽  
Futures Market ◽  
Spot Price ◽  
Futures Trading ◽  
Market Prices ◽  
Content Type ◽  
Commodity Derivatives ◽  
Spot Volatility ◽  
Guar Seed

Purpose – Guar Seed crop is ruling the Indian International business mainly due to its application as a drilling fluid in shale energy industry concentrated in the USA. One of the allegations against futures market is its possible role in increasing the volatility of underlying physical market prices. Suspension of guar seed futures contract in 2012 at National Commodity Derivatives Exchange of India (NCDEX)-India, has reignited the controversy and raised an alarm bell to peek into obscure world of Indian commodity derivatives market. Against the backdrop of fiasco in guar futures trading, the purpose of this paper is to investigate whether sudden surge in futures trading volume leads to increase in the volatility of spot market prices. Design/methodology/approach – Guar seed spot returns volatility is modeled as a GARCH (1, 1) process. Futures trading volume and open interest are segregated into expected and unexpected components. The data are analyzed from 2004 to 2011 using Augmented GARCH model to study the contemporaneous relationship between spot volatility and unexpected futures trading activity and Granger Causality test for examining the dynamic relationship between them and ascertaining causality. Findings – Augmented GARCH model reports positive relationship between unexpected futures trading volume (UTV) and spot returns volatility, and, Granger Causality flows from UTV to spot volatility. Therefore, when the level of futures trading volume increases unexpectedly, the volatility of spot prices increases pointing toward the destabilizing impact of futures trading. However, hedger’s activity, represented by open interest is not seen to have any causal/destabilizing impact on spot price volatility of guar seed. Practical implications – The study provides empirical evidence to support the concern of regulators, genuine hedgers and other traders about the presence of excessive speculation and market manipulations perpetrated through futures market that is disturbing the underlying physical market instead of strengthening it by aiding in price discovery and risk mitigation. Originality/value – There are very few studies which have empirically investigated the temporal relation between volume and volatility in Indian agricultural commodity markets. With guar seed as a special case the present study investigates statistically the impact of futures trading on spot price volatility. In light of the findings of the study, the curb imposed on guar seed futures trading in 2012 was justified.

Option ordering and coordination strategies for a two-periodsupply chain

Kybernetes ◽  
2019 ◽  
Vol 48 (3) ◽  
pp. 471-495 ◽  
Author(s):  
Nana Wan ◽  
Xiaozhi Wu
Keyword(s):  
Supply Chain ◽  
Stochastic Dynamic ◽  
Supply Contracts ◽  
Coordination Problem ◽  
Market Prices ◽  
Content Type ◽  
Coordination Strategies ◽  
Option Contracts ◽  
Optimal Ordering

PurposeDue to rapid product obsolescence, there is a significant decline in the market prices, which causes that the sale season is often divided into two periods. This paper aims to consider a class of two-period supply contracts that offer the retailer the ordering flexibility in response to the market changes. This paper analyzes the two-period ordering and coordination problem with option contracts.Design/methodology/approachThe authors incorporate call, put and bidirectional option contracts into the two-period ordering model. By applying stochastic dynamic programming, the authors derive the retailer’s optimal ordering policies for two periods. By benchmarking the case without option contracts, they highlight the advantage of option contracts. Through the mutual comparisons, the authors also explore the impacts of different option contracts. On this basis, the authors explore the conditions on which two-period supply contracts containing options can coordinate the supply chain.FindingsThis study shows that the retailer is always better off with option contracts. In addition, the effectiveness of different option contracts depends on the option contract parameters. When the parameters are the same for different option contracts, bidirectional option contracts are superior to call and put ones; otherwise, bidirectional option contracts might be superior or inferior to call and put ones. If designed properly, two-period supply contracts containing options can coordinate the two-period supply chain.Originality/valueThis paper is the first to highlight the value of option contracts as well as explore the role of different option contracts on the two-period procurement problem. The insights derived from our analysis can provide a good way on how to help the retailer work more efficiently in a two-period setting.

Price discovery and volatility spillovers in futures and spot commodity markets

2014 ◽  
Vol 11 (2) ◽  
pp. 211-226 ◽  
Author(s):  
Mantu Kumar Mahalik ◽  
Debashis Acharya ◽  
M. Suresh Babu
Keyword(s):  
Price Index ◽  
Price Discovery ◽  
Commodity Prices ◽  
Spot Market ◽  
Commodity Markets ◽  
Spot Price ◽  
Future Price ◽  
Reverse Causality ◽  
Content Type ◽  
Volatility Spillovers

Purpose – The purpose of this paper is to investigate empirically the price discovery and volatility spillovers in Indian spot-futures commodity markets. Design/methodology/approach – The study has used four futures and spot indices of Multi-Commodity Exchange, Mumbai. The study also employs vector error correction model (VECM) and bivariate exponential Garch model (EGARCH) to analyze the price discovery and volatility spillovers in Indian spot-futures commodity market. Findings – The VECM shows that agriculture future price index (LAGRIFP), energy future price index (LENERGYFP) and aggregate commodity index (LCOMDEXFP) effectively serve the price discovery function in the spot market implying that there is a flow of information from future to spot commodity markets but the reverse causality does not exist. There is no cointegrating relationship between metal future price index (LMETALFP) and metal spot price index (LMETALSP). Besides the bivariate EGARCH model indicates that although the innovations in one market can predict the volatility in another market, the volatility spillovers from future to the spot market are dominant in the case of LENERGY and LCOMDEX index while LAGRISP acts as a source of volatility toward the agri-futures market. Research limitations/implications – The results are aggregate in nature. Further study at disaggregated level will provide further insights on behavior of specific commodity prices and the price discovery process. Originality/value – The paper provides useful information about the evolution and structures of futures commodity trading in India, related literature and relevant methodology concerning the hypotheses.

scholarly journals Volatility Dynamics in Oil and Oilseeds Spot and Futures Market in India

2016 ◽  
Vol 41 (2) ◽  
pp. 132-148 ◽  
Author(s):  
Meenakshi Malhotra ◽  
Dinesh Kumar Sharma
Keyword(s):  
Futures Markets ◽  
Garch Model ◽  
Price Volatility ◽  
Spot Market ◽  
Futures Market ◽  
Spot Price ◽  
Volatility Spillover ◽  
Trading Activity ◽  
Futures Trading ◽  
The Impact

Executive Summary India occupies the fifth position in the vegetable oil economy of the world. The demand for oilseeds and vegetable oil has far exceeded the domestic output necessitating huge imports. Futures market helps to bring price stability for the development of the underlying physical market. The present study investigates the volatility dynamics in spot and futures markets of select oil and oilseeds commodities. The objectives of this article are to study (a) the information transmission process between spot and futures markets, also called volatility spillover and (b) the impact of futures trading activity on the volatility of physical market prices. The commodities selected from oil and oilseeds segment are refined soya oil, mustard seed, crude palm oil, and mentha oil. The study uses basic Generalized Autoregressive Conditional Heteroscedasticity (GARCH) model to capture volatility in prices of the selected commodities. Bivariate GARCH model makes use of information in the history of two different markets for testing volatility spillover between two markets of the same underlying commodity. The relationship between futures trading activity and spot price volatility is investigated for examining the impact of futures trading activity on the volatility of underlying spot market. Two variables, viz., futures trading volume and open interest are decomposed into expected and unexpected components and are taken as a proxy for the level of trading activity. The contemporaneous and dynamic relationships are studied with the help of augmented GARCH model and Granger causality, respectively. It is observed that there is an efficient transmission of information between spot and futures markets but it is the spot market which leads to the flow of information to futures and hence causes greater spillover of volatility. The spot market has a greater impact on the volatility of futures market, indicating that informational efficiency of oilseeds spot market is stronger than that of the futures market. The contemporaneous and dynamic relationship between spot price volatility and futures trading activity tested with econometric models provide evidence of the destabilizing impact of an unexpected increase in futures trading activity (volume or open interest) on the spot price volatility in three out of four commodities studied. This indicates that badly informed traders present in futures market are destabilizing the underlying spot market by inducing noise and lowering the information content of prices.

A note on dynamic hedging

2015 ◽  
Vol 16 (2) ◽  
pp. 190-196
Author(s):  
Moawia Alghalith ◽  
Christos Floros ◽  
Ricardo Lalloo
Keyword(s):  
Continuous Time ◽  
Futures Markets ◽  
Price Volatility ◽  
Spot Price ◽  
Risk Averse ◽  
Dynamic Hedging ◽  
Basis Risk ◽  
Content Type ◽  
Unit Increase ◽  
Using Data

Purpose – The purpose of this paper is to empirically test dynamic hedging, using data from the FTSE-100 and Standard & Poor’s (S&P) 500 futures indices. Design/methodology/approach – The authors introduce a dynamic continuous-time hedging model in futures markets. The authors further relax the statistical-independence assumption between the spot price and basis risk. Findings – The authors show that the investors are, on average, quite risk averse. The authors find that a one unit increase in the price volatility reduces the hedged FTSE-100 (S&P 500) by 645.62 (777.07) units. Similarly, a one unit increase in basis risk reduces the hedged FTSE-100 (S&P 500) by 403.57 (378.54) units. The authors’ approach shows that risk-averse investors should decrease their hedge (i.e. increase their equity allocation) with an increase in index price risk. Practical implications – These findings are helpful to risk managers dealing with futures markets. Originality/value – The contribution of this paper is that it successfully introduces a dynamic continuous-time hedging model in futures markets.

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