The impact of embedded location options on price discovery of agricultural futures contracts – the evidence from the Chana contract

Purpose Embedded options can create asymmetries in information impounded by cash and futures markets, causing errors in price discovery estimation. This paper aims to investigate the impact of embedded location options on measures of price discovery. Design/methodology/approach Various price discovery metrics are computed using observed futures prices that contain embedded location options and cash prices for Chana. Prices of a futures contract that contains no options using observed futures prices and estimates of location option value are synthesized. The price discovery measures are recomputed using synthetic option-adjusted futures contract prices and cash prices, and changes in these measures are attributed to the impact of the embedded location option. Findings If the presence of the location option is ignored, futures appear to dominate price discovery. Once the location option is adjusted for, cash markets are found to dominate price discovery. Research limitations/implications The lack of complete time-series data from the exchange for multiple commodities allows only limited empirical evidence for generalizing conclusions. Practical implications This paper highlights that regulators, exchanges and policymakers in India need to revisit delivery specifications of agricultural commodity futures contracts to enhance their utility from a price discovery perspective. Originality/value This work shows that ignoring the presence of embedded options can cause significant errors in price discovery assessment of agricultural futures contracts, particularly in heterogenous cash markets.

Simulating Multi-Asset Classes Prices Using Wasserstein Generative Adversarial Network: A Study of Stocks, Futures and Cryptocurrency

Financial data are expensive and highly sensitive with limited access. We aim to generate abundant datasets given the original prices while preserving the original statistical features. We introduce the Wasserstein Generative Adversarial Network with Gradient Penalty (WGAN-GP) into the field of the stock market, futures market and cryptocurrency market. We train our model on various datasets, including the Hong Kong stock market, Hang Seng Index Composite stocks, precious metal futures contracts listed on the Chicago Mercantile Exchange and Japan Exchange Group, and cryptocurrency spots and perpetual contracts on Binance at various minute-level intervals. We quantify the difference of generated results (836,280 data points) and original data by MAE, MSE, RMSE and K-S distances. Results show that WGAN-GP can simulate assets prices and show the potential of a market simulator for trading analysis. We might be the first to look into multi-asset classes in a systematic approach with minute intervals across stocks, futures and cryptocurrency markets. We also contribute to quantitative analysis methodology for generated and original price data quality.

Hedging Effectiveness of Commodity Futures Contracts to Minimize Price Risk: Empirical Evidence from the Italian Field Crop Sector

Over the last years, farmers have been increasingly exposed to income risk due to the volatility of the commodities prices. Among others, hedging in futures markets (i.e., financial markets) represents an available strategy for producers to cope with income risks at farm level. To better understand the advantages of such promising tools, this paper aims at analyzing the hedging effectiveness for soybean, corn and milling wheat producers in Italy. Following the literature, three different methodologies (i.e., naïve, OLS, GARCH) are applied for the estimation of the hedge portfolio, then compared to an unhedged portfolio for assessing the income risk reduction. Findings confirm the hedging effectiveness of futures contracts for all the considered commodities, showing also that this effect increases with longer hedge horizons, and also showing better performances for the European exchange market (i.e., Euronext), compared to the North American counterpart.

The Oil Futures and Options Markets in 2020: The “Message from Markets”

This paper considers the response of the equity and oil markets to the onset of crisis conditions after February 15, 2020. Based on derivative markets for equities and WTI (West Texas Intermediate) crude-oil futures contracts, implied equity and oil volatilities quantify the depth of the crisis and contrast it with the previous ones. The estimated Black [(1976) Journal of Financial Economics, 3, 167–179] vol skew and Merton [(1976) Journal of Financial Economics, 3, 125–144] option model parameters are able to discern between demand- and supply-side facets. The time when the futures curve is in contango identifies the beginning and, to date, conclusion of the crisis. Using the CAPM, co-movement of oil and equity prices permits computing forecasts of spot oil prices. In considering these events, we recognize the essential role of prices in financial markets: They are conveyors of information, the “Message from Markets,” in which financial theory proves useful, practical and applicable.

URGENSI PENGATURAN UNDANG-UNDANG PASAR FISIK ASET KRIPTO (CRYPTO ASSET)

Crypto Assets is a new alternative investment concept in Indonesia. The legal basis for regulating crypto assets currently in force in Indonesia cannot accommodate the development of the Crypto assets concept which continues to undergo significant changes. The physical market for crypto assets is incompatible when regulated by the provisions of Law Number 32 of 1997 on commodity futures trading and its amendments, namely Law Number 10 of 2011 because the physical market has conceptual differences with the provisions of the futures market in general. The object traded in the physical market is the commodity, while in the commodity futures market the object is futures contracts (and their derivatives) for commodities traded in the physical market. The scope of the commodity futures market as regulated in Article 1 of the Commodity Futures Trading Law does not accommodate commodity trading in the physical market. The urgency of regulating the physical market for crypto assets with a separate law is the implementation of the principle of legal certainty and protection of crypto asset investors. The method used in writing this journal is normative research using books, journal references, and laws and regulations that are relevant to the legal issues in this study. The results of this study indicate that the regulation of the physical law on crypto assets is needed because crypto assets should be regulated into two separate arrangements so that it is not appropriate if the regulation regarding crypto assets is only accommodated by the Commodity Futures Trading Law.

Cross-Hedging Portfolios in Emerging Stock Markets: Evidence for the LATIBEX Index

We consider alternative possibilities for hedging spot positions on the FTSE LATIBEX Index, the index of the only international market exclusively for Latin American firms that is denominated by the euro. Since there is not a futures market on the index, it is unclear whether a relatively successful hedge can be found. We explore the plausibility of employing futures on four stock market indices: EUROSTOXX 50, S&P500, BOVESPA, and IPC, and simulate the results that could be obtained by a hedge position based on either unconditional or conditional second order moments estimated from different asymmetric GARCH models. Several criteria for hedging effectiveness suggest that futures contracts on BOVESPA should be preferred, and that a salient reduction in risk can be achieved over the unhedged LATIBEX portfolio. The evidence in favor of a better performance of conditional moments is very clear, without significant differences among the alternative GARCH specifications.

Relationships between Copper Futures Markets from the Perspective of Jump Diffusion

This paper analyzes the price correlation effect between domestic and foreign copper futures contracts. The VAR-BEKK-GARCH (1,1) spillover effect model and the BN-S class non-parametric model based on the jumping perspective are used. The co-integration test shows a long-term equilibrium relationship between the three copper futures markets, and the Granger causality test shows that copper futures contracts have significant two-way spillover effects between different periods in Shanghai for New York copper and unidirectional mean spillover effects for London copper. The BEKK model shows significant bidirectional fluctuation spillover effects between the futures contracts of the Shanghai, London, and New York copper markets before the stock market crash. After the crash, Shanghai and New York copper have significant one-way fluctuation spillover effects on London copper futures contracts. There are jumps within a single market, and the number of joint jumps between markets increases with the significance level.

Asymmetric Volatility Relevance in Risk Management: An Empirical Analysis using Stock Index Futures

The objective of this research work is to show the relevance of asymmetries in estimating volatility. The methodology consists in the application of ARCH-type models and implied volatilities of options (IV) to estimate Value-at-Risk (VaR). These for a portfolio of stock index futures for various time horizons. The empirical analysis is carried out for the futures contracts for the Standard and Poors 500 and Mexican Stock Exchange Indices. According to the results, the IV model is superior in terms of precision compared to the ARCH-type models. It is recommended to use the relevant statistical gains when asymmetries are included with respect to when asymmetries are not used. The referred gains range from 4 to 150 basis points of minimum capital risk requirements. The originality of the present work consists of showing the importance of considering the asymmetric effects with IV and ARCH-type models in volatility forecasts within risk management analysis. It is concluded that the methodology means gains in monetary terms.

A risk model to compute the volatility and the need for collateral margins in energy futures contracts in Brazil

Purpose Brazil is characterized by the inexistence of a more robust system of guarantees and rules to minimize risks and protect agents in energy futures contracts. In this sense, this study aims to answer the question of how a centralized clearing agent can compute safety margin requirements to help reduce the systemic risk of the energy futures contracts market in Brazil. Design/methodology/approach The intermediate steps and specific objectives are to analyze the volatility behavior, identify the autoregressive conditional heteroscedasticity effects and model the variance of the return series. Based on this, the authors calculate the value-at-risk and conditional value-at-risk metrics for the energy futures contracts. As a robustness test, the authors added a peak over threshold methodology from extreme values theory. Findings In general, monthly products require margins because of their higher variance. With the asymmetrical distribution of returns, the authors needed to consider different maintenance margins for the long and short positions. It was also shown that two guarantee margins were required to secure the contracts as follows: the initial margin and the maintenance margin. The three factors that defined the size of the maintenance margin the volatility, skewness and kurtosis of the return series. Originality/value The contribution of this study lies in promoting the understanding of the risk dimensions of the energy derivatives market in Brazil and it offers concrete recommendations for how to mitigate this risk through market mechanisms and structures. Similar arrangements can be applied to other emerging markets.