Futures Markets and Spot Price Volatility: A Case Study

2008 ◽  
Vol 50 (2) ◽  
pp. 247-257 ◽  
Author(s):  
C. W. Morgan
Keyword(s):  
Futures Markets ◽  
Price Volatility ◽  
Spot Price

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.

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.

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.

scholarly journals Raiffa-Kalai-Smorodinsky Bargaining Solution for Bilateral Contracts in Electricity Markets

Energies ◽  
2020 ◽  
Vol 13 (9) ◽  
pp. 2397
Author(s):  
Reinaldo Crispiniano Garcia ◽  
Javier Contreras ◽  
Matheus de Lima Barbosa ◽  
Felipe Silva Toledo ◽  
Paulo Vinicius Aires da Cunha
Keyword(s):  
Electricity Markets ◽  
Price Volatility ◽  
Spot Market ◽  
Nash Bargaining Solution ◽  
Nash Bargaining ◽  
Bargaining Solution ◽  
Market Pricing ◽  
Bilateral Contracts ◽  
Generation Company

In electricity markets, bilateral contracts (BC) are used to hedge against price volatility in the spot market. Pricing these contracts requires scheduling from either the buyer or the seller aiming to achieve the highest profit possible. Since this problem includes different players, a Generation Company (GC) and an Electricity Supplier Company (ESC) are considered. The approaches to solve this problem include the Nash Bargaining Solution (NBS) equilibrium and the Raiffa–Kalai–Smorodinsky (RKS) bargaining solution. The innovation of this work is the implementation of an algorithm based on the RKS equilibrium to find a compromise strategy when determining the concessions to be made by the parties. The results are promising and show that the RKS approach can obtain better results compared to the Nash equilibrium method applied to a case study.

scholarly journals Mean-Variance Analysis of Alternative Hedging Strategies

1972 ◽  
Vol 4 (1) ◽  
pp. 123-128 ◽  
Author(s):  
David Holland ◽  
Wayne D. Purcell ◽  
Terry Hague
Keyword(s):  
Futures Markets ◽  
Market Price ◽  
Theoretical Models ◽  
Spot Price ◽  
Hedging Strategies ◽  
Optimum Position ◽  
Futures Price ◽  
The Difference ◽  
Mean Variance ◽  
Over Time

Much of the research in commodity hedging has concentrated upon the development of theoretical models describing the optimum position in cash and futures markets. Other studies have shown that the difference between current spot price and futures price represents the market price for storage, processing services, or both. The revenue stabilizing potential of futures markets for commodities with continuous as opposed to noncontinuous inventories has also received attention. However, very little work or literature is publicly available on how different hedging strategies actually would have performed for a particular commodity over time.

Design and pricing of derivative contracts in a spectrum market

2015 ◽  
Vol 02 (01) ◽  
pp. 1550005 ◽  
Author(s):  
Aparna Gupta ◽  
Koushik Kar ◽  
Praveen K. Muthuswamy
Keyword(s):  
Wireless Channels ◽  
Numerical Study ◽  
Price Volatility ◽  
Spot Price ◽  
Spectrum Access ◽  
Self Similarity ◽  
Price Process ◽  
Management Objectives ◽  
Price Increases ◽  
Spectrum Market

We propose a secondary spectrum market that allows wireless providers to purchase spectrum access licenses of short duration in the form of spot contracts and derivative contracts on spectrum. A spot contract provides immediate access to one or more wireless channels and cannot be further traded. On the other hand, derivative contracts on spectrum typically involve purchase of spectrum licenses in the future for predefined terms, and they can play an important role in risk management objectives of wireless providers. In this paper, we utilize a model for the spot price of spectrum licenses in which the price increases with increasing congestion in spectrum usage caused by the primary demand for spectrum. The spot price process, modeled as driven by a fractional Brownian motion (fBm) process to capture the self-similarity properties of wireless traffic, is utilized in fractional stochastic calculus to obtain the value of derivative contracts. We design a variety of derivative contracts considering the risk profile of both the buyers and sellers of spectrum. Through a detailed numerical study, we examine the value of these derivative contracts for changes in spot price volatility and the parameters that define the contracts.

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