Forward Contracts Research Articles

The Legal Nature of Deliverable Futures

The article studies the legal nature of deliverable futures. The author aims to define a deliverable futures by comparing its legal nature with the nature of the closest financial instrument to it — a deliverable forward. Futures differs from the forward contracts by the obligatory participation of the exchange as a mandatory facilitator in the conclusion and execution of the transaction. It is proposed to consider exchange transactions as a kind of aleatorial contracts, but contrary to bets they are subject to judicial protection under Russian law. The delivery futures is a complex contract, which combines the features of aleatoric transactions and purchase contracts. One the one hand it is related to the former by the presence of stochasticity. On the other hand it is related to the latter in that the underlying assets are sold for a fee.

Public pension contract minimalism

AbstractThe national pension debt and COVID crises have collided. Post‐pandemic economic decline has escalated existing financial strains on state and local pension plans, impacting workers and the public welfare. With unfunded obligations exceeding one trillion dollars, many of these plans are in jeopardy. But the movement to reform government pension contracts has yet to adopt an anchoring idea, leaving judicial decisions in disarray and policymakers without guidance about how to shore up troubled retirement systems. The crux of the problem is the many meanings of contract under state and US Contract Clauses that prevent pension reform. This Essay endorses a promising path forward—contract minimalism. “Contract minimalism” concentrates on the duration of government pension contracts. It posits that public and private employment law should be treated the same. Like its private law counterpart, public sector employment at‐will ought to consist of a daily contract interval. A contract‐a‐day concept entitles employers to change the plan prospectively, with employees receiving a proportionate share of benefits for work performed. Just as several agreements safeguard salaries for labor, they should also mirror the protection afforded to deferred benefits like pensions. Contract minimalism additionally puts public and private sector employers on the same legal footing as to the authority to change pension plan terms. Thus, it aligns public pension benefits with overlapping fields of law, placing them on a firm conceptual foundation. The minimalist approach also has the advantage over approaches that are insufficiently attentive to scarce government resources or employee old‐age security. By protecting pension benefits early and incrementally, it advances a middle path with fairer, more coherent results. In the present post‐pandemic era of hard choices, minimalism provides an equilibrium between the over‐ and under‐protection of pension benefits.

Determinants of the Relationship between Wholesale and Retail Energy Prices in the Czech Republic

Rising energy prices have become a focus of interest for politicians at the international, European, and national levels. Energy prices are the main determinant of profitability or even the existence of the industrial sector. So, it is accepted that energy policy aims to ensure a secure, sustainable, competitive, and affordable energy supply for households and businesses. However, the recent geopolitical situation has significantly affected the energy policy of the European Union, raising concerns about energy security and an energy crisis. This crisis has had social, economic, and political consequences, including energy poverty. In this context, it is essential to understand the determinants of the relationship between wholesale and retail energy prices. This paper presents a model proposal to be used by the Czech Energy Regulatory Authority. The model of average retail prices depends on the type of contract - spot or forward, with the three-year forward contract having the largest weight on the retail price. Therefore, our study shows that long-term contracts significantly impact retail energy prices, highlighting the importance of regulatory monitoring of market strategies. Methodologically, the model is based on a multivariate regression analysis solved with the least absolute deviations and data for the period 2012 to 2023. The findings of the study contribute to a better understanding of the complexity of the dynamics of energy prices and support policymakers while attempting to ensure energy affordability and sustainability.

Managing Currency Risk in Global Supply Chains: Resilience Strategies

Currency risk was a significant difficulty for firms involved in international commerce in the current global economy. The profitability and competitiveness of organisations with supply chains that span across borders were greatly affected by fluctuations in exchange rates. This introduction examined the intricacies of managing currency risk in global supply chains, investigating the most recent solutions used by organisations to strengthen their operations. Over the last 10 years, there has been an extraordinary increase in globalisation, characterised by more market integration and increased international trade. Nevertheless, globalisation brings with it not just benefits but also inherent concerns, with currency volatility being the most prominent among them. According to projections by Grand View Research, Inc., the global currency exchange market was expected to reach a value of $28.8 trillion by 2025. This highlights the significant currency risk that firms throughout the globe were facing. The emergence of the COVID-19 pandemic emphasised the need to effectively handle currency risk in worldwide supply networks. Amidst trade interruptions and shifting currency rates, economies faced increased uncertainty and volatility, which in turn affected enterprises. Research conducted by the Foreign Monetary Fund had shown that there was a significant increase of 59% in currency volatility during the early phase of the epidemic. This has worsened the difficulties faced by companies that heavily depend on foreign commerce. In light of this situation, companies were obligated to reevaluate their methods for managing currency risk to strengthen their ability to withstand challenges and reduce the possibility of financial losses. Conventional methods such as forward contracts and currency options, while somewhat successful, may not be enough to handle the intricacies of contemporary supply chains. As a result, organisations are using novel methods and technology to effectively manage currency risk. Recent developments in Financial Technology have created new opportunities for innovative currency risk management strategies. Blockchain technology had the potential to provide transparent and secure cross-border transactions, which helped decrease the risk of currency exposure. Moreover, the advent of Artificial Intelligence and Machine Learning algorithms enabled organisations to analyse extensive information and forecast currency fluctuations with enhanced precision. Collaborative alliances within supply chains provided a strategic opportunity to reduce currency risk. Companies may enhance risk mitigation and improve their ability to adapt to market dynamics by developing stronger connections with suppliers and consumers. This can be achieved via the exploration of collaborative hedging methods and the sharing of risk burdens. Nevertheless, effectively managing currency risk in international supply chains requires the ability to quickly adapt, come up with new ideas, and work together. This summary summarised important findings from the following conversation, emphasising the need for proactive risk management techniques in protecting against the uncertainties of the global economy. Keywords: Currency risk management, Global supply chains, Exchange rate volatility, International commerce, Financial technology (Fintech).

Autopsy of a futures market failure: Japan’s Dojima rice futures in the early 21st century

Futures markets promise improved price transparency and risk mitigation for staple commodities important to many developing countries, but they can fail even in developed economies with modern financial institutions. We investigate rice futures trading in Japan at the Osaka Dojima Exchange to identify the reasons underlying its failure in 2021. Our analysis reviews the multiple necessary conditions for a successful commodity futures market. We find the Japanese rice market did not meet many of these conditions. The spot market was fragmented with heterogeneous goods and a single dominant firm. Futures trading was unable to facilitate price discovery or effective hedging activity. To the extent it was traded, the Dojima rice futures contract was instead used as a forward contract for making and taking physical delivery. In addition, there was political opposition and regulatory uncertainty around futures trading. Using detailed data on trader positions in the futures market, we show how these factors contributed to diminished interest in futures trading from firms who handle physical commodities. The lessons from the Japanese case are useful for traders, exchanges, and policy makers, especially those in countries where futures markets may face similarly unfavorable economic and political conditions.

ATTRACTION OF RESOURCES TO UKRAINIAN AGRIBUSINESS THROUGH AGRARIAN RECEIPT: ACCOUNTING ASPECT

The purpose of the study was to disclose the content of agrarian receipts and the mechanism for their application in the settlement system of Ukrainian agricultural producers as an alternative way to attract resources for doing business under martial law in Ukraine, as well as to make proposals for their accounting in order to avoid business risks. The state of lending to agricultural producers during martial law is analyzed and the importance of lending against agrarian receipts is substantiated. The experience of Brazil in the process of lending for the future harvest was assessed. The history of the introduction of agrarian receipts in Ukraine is characterized on the basis of borrowing the idea of Brazil. The essence of agrarian receipts is revealed and the legal framework for their circulation in Ukraine is investigated. The difference between agrarian receipts and other financial instruments (bill, forward contract, pledge) is determined. The problematic aspects of the introduction of agrarian receipts into circulation, which hinder the effectiveness of the use of this tool by agricultural enterprises in the process of attracting financial resources, are systematized. The business models of relationships between counterparties in the process of circulation of agrarian receipts are characterized. Theoretical and practical aspects of accounting for agrarian receipts have been studied and problematic aspects in the methodology for reflecting settlements by agrarian receipts in the system of accounting accounts have been identified. Organizational, methodological and practical recommendations are proposed aimed at improving the procedure for recording transactions with commodity agrarian receipts in the accounting system as an innovative way of financing agricultural producers at the domestic and international levels. This will make it possible to quickly collect data on the circulation of agrarian receipts and improve information support in making managerial decisions by various groups of Ukrainian and foreign stakeholders.

Forward contracting and the endogenous activity of heterogeneous firms

AbstractForward contracting in an ‐firm quantity‐setting oligopoly with heterogeneous costs introduces the possibility that relatively efficient firms deter the activity of inefficient rivals by reducing their margins. The equilibrium number of firms producing positive quantities can be any of depending on the level of demand relative to firm‐specific activity thresholds, with more firms active at higher demand levels. If only one firm is active, the Bertrand outcome is obtained. This potential reduction of the number of active firms may lessen the procompetitive effect of forward sales, but does not eliminate it entirely. We explore the competition policy implications of the endogenous activity of firms, in particular for merger analysis.

FX Open Forward

FX Open Forward is a derivative instrument where the contract holder has the obligation to purchase a specific amount of foreign currency under a fixed exchange rate by the contract expiry date. In contrast to a traditional forward contract, a distinctive feature of FX Open Forward is that the timing and notional size of the currency conversion can be freely chosen by the contract holder. Under a Black–Scholes model where interest rates can be negative, we provide a complete solution of the early exercise strategy of an FX Open Forward. When domestic rate and foreign rate are both positive (negative), the full contractual notional should be exercised when the spot FX level is sufficiently high (low). Unlike American options, the optimal waiting region of FX Open Forward is always connected even when interest rates are negative.

Arbitrage outcome between conventional and Islamic finance of yield and forward rates in bond market

Purpose In this research, arbitrage opportunity is tested between the yield rates computed by the NSS model, and the computed forward rates between conventional and Islamic finance to see any arbitrage opportunity. The research questions are the conventional and Islamic finance yields at the same level and equal to each other to avoid arbitrage? Whether conventional and Islamic forward rates differ significantly and thus create any arbitrage opportunity. This study aims to find the presence or absence of arbitrage between conventional and Islamic finance yield rates. Design/methodology/approach The NSS model is the latest model in calculating yield and forward rates. In the method the error level is minimized so expected yield rate and given yield rate both converged (Vahidin and Anastasios, 2020). When they converged it gives the researchers all six months’ yield rates. For the Nelson Siegal method, all the six months’ yield rates are available and these yield rates can be used to compute the forward rates. Findings The authors concluded there is a significant difference between the conventional yield rate and the Islamic yield rate. It suggests that because there are significant differences, its suggest arbitrage is possible. So anyone interested in making a guaranteed profit. The conventional yield rates are lower; hence, anyone can borrow from the conventional finance system and invest the money in the Islamic financial system because investments are getting higher rates of income in the form of yield rate in Islamic Finance. So, one can make money because of this difference. Statistically, it is possible to make money, but practically, the authors observed the difference, however it is very meager. The arbitrage opportunity between Islamic finance and conventional finance will not affect the economy because the significant difference is too small. The disturbance in the arbitrage opportunity due to the values is very meager and insignificant. Research limitations/implications This research does not address the derivative contracts’ role in risk management; future researchers could take up this as another research. Practical implications This research will be beneficial for financial institutions, especially institutional investors. Besides, this research will help the regulators and investment bankers in assisting where and future losses especially bond portfolios in conventional finance and Islamic finance. This study will also contribute and help the asset manager of mutual funds in the mutual fund industries. Social implications In effect, this research will strengthen the financial system, capital market and bond market, derivative contracts such as options contracts, futures contracts, swap contracts and forward contracts will use computed forward rates for assessing future losses (value at risk [VaR]) and to hedge them (Balakrishnan, 2020). Originality/value As this topic is rarely studied it will increase the literature present in this domain.

Forward Contract Hedging Analysis as a Protection Effort Transaction Exposure

The purpose of this research is to identify the risks related to currency fluctuations that arise from transactions in foreign currencies or other currencies. A company must be capable of managing foreign exchange activities in order to reduce or eliminate risks. One way to do that is to carry out hedging trades. You may ensure that future fluctuations in foreign exchange rates won't affect the foreign exchange rate utilized for payments (outflow) or the amount of foreign currency received (inflow) by using hedging. Both a qualitative descriptive research design and a case study approach are used in this study. A case study called PT Akasha Wira International, Tbk was used

Expediting battery investment returns for residential customers utilising spot price-aware local energy exchanges

This paper presents a local energy exchange mechanism to benefit residential customers and retailers under variable wholesale market spot prices. To do so, a peer-to-peer (P2P) trading-enabled local energy market (LEM) is proposed to facilitate frequent energy transactions among participants. The proposed LEM mechanism considers market operational constraints and maximises electricity cost reductions. Further, the proposed LEM optimises the customers' investment return for battery energy storage systems (BESSs) and minimises retailers’ financial losses during higher spot prices in the wholesale market. Finally, a case study is demonstrated using real-world Australian data in which P2P trading is performed between interested buyers and sellers. Two scenarios with high and low wholesale market spot prices are analysed comprehensively considering five metrics such as solar-to-spot (STS); solar-to-load (STL); forward buy contract (FBC)-to-load (FBC-L); spot-to-load (Short); and FBC-to-spot (Long). The simulation results reveal that the customers reap substantial benefits from the proposed LEM in contrast with business-as-usual (BAU), allowing them to expedite BESS investment returns. Also, the proposed LEM helps a retailer decrease the effect of higher spot prices by reducing its unexpected financial losses while improving self-consumption and self-sufficiency in the local energy network.

Comparative Analysis of Deliverable and Non-Deliverable Contracts in the Hong Kong Trading Market - Taking RMB as an Example

NDFs are over-the-counter traded foreign exchange derivative products. The settlement of an NDF contract does not involve the delivery of the underlying currency pair. Instead, it involves a net payment in a convertible currency (usually the US dollar), which is proportional to the difference between the agreed forward exchange rate and the subsequently realized spot fixing. Hong Kong's geopolitical location as an outlet that connects mainland China to the world gives it an essential role in researching CNY's international features Hong Kong's trading market serves as a crucial link for the expansion of RMB usage, with the resulting shifts in positions supporting the interpretation of the role of RMB in the process of globalization of the currency, as well as the interpretation of financial markets. This study examines how the Hong Kong market serves as a critical hub for the currency's global integration through its trading of RMB, and focuses on the interplay between market regulations, economic policies, and the intricate balance of supply and demand affecting deliverable (CNY and CNH) and non-deliverable forward (NDF) contracts. The research findings reveal that the examination of transaction data from Hong Kong's commodity exchange demonstrates a complicated interconnection between deliverable (CNY and CNH) and non-deliverable forward (NDF) contracts. This intricate relationship highlights the Chinese Yuan's (RMB) fluctuating role in the market, influenced by factors such as market sentiment, regulatory changes, and economic conditions. In essence, the RMB's trading volumes and value in this setting reflect its sensitivity to both domestic and international market shifts.

An Assessment Method of Deviation Electricity Responsibility in China’s Forward Electricity Market Based on Time-Sharing Trading Prices

Electricity forward market contract trading constitutes a principal trading method in the electricity market. To address deviations from or non-compliance with contracts in China’s forward electricity market, an Energy Deviation Settlement (EDS) mechanism has been implemented. However, the current EDS mechanism is marred by unscientific penalties and imprecise deviation cost assessments. Consequently, this paper proposes a deviation responsibility assessment method based on time-sharing trading prices. Initially, the total annual contracted power is decomposed to derive the hourly deviation power for all 8760 h of the year. Subsequently, considering the power supply cost and load level, this paper proposes four pricing strategies for typical supply–demand scenarios and constructs a time-sharing trading pricing model based on cost pricing. Finally, this paper conducts a simulation using actual electricity data from China’s Province H. The results demonstrate that, compared to the traditional EDS mechanism, the proposed method can more accurately and reasonably measure the value of deviation responsibility. Concurrently, it can be better integrated with the future development of real-time spot market operations.

Risk Management and Different Financial Approaches to Reduce Business Risk

This article examines three different risk management methods: asset hedging by shorting stocks, cash flow hedging using forward contracts, and futures contracts. The article explains each method's rationale, application, advantages, and disadvantages. By presenting and explaining these methods, this study aims to help readers gain insights into their effectiveness in managing risk in different types of transactions. The content of the article supports the readers to have a better understanding and gives some strategies for risk management, and provides guidance for decision-makers to mitigate potential risks in their financial operations. Asset hedging by shorting stocks involves selling borrowed stocks in anticipation of a decline in their price, thereby offsetting the potential loss of a declining asset. This strategy allows an investor to profit from a decline in stock prices. Cash flow hedging through forward contracts involves entering into an agreement to buy or sell an asset at a pre-determined future price, thereby reducing the risk of adverse price movements and ensuring a stable cash flow. On the other hand, futures contracts are standardized agreements to buy or sell an asset at a future date, are traded on public markets, provide legal protection for both parties through financial intermediaries, and allow investors to lock in prices. While these risk management methods have obvious advantages, such as potential gains to offset the risk of asset depreciation during market downturns, protection against adverse price movements, and price stabilization, they also have inherent risks and limitations that need to be carefully considered.

A Tailored Derivative Instrument to Mitigate the Price-and-Quantity Risk Faced by Wind Power Companies

The intermittent nature of wind generation combined with the well-known volatility of electricity spot prices expose Wind Power Companies (WPCs) committed to long-term forward contracts to the so-called price-and-quantity risk. Several instruments were designed in the past years to mitigate this risk exposure. However, most of them were mainly constructed to cope with only one of its parts, i.e., price or generation uncertainty. To tackle this issue, in this work, we propose a tailored derivative instrument for WPCs leveraging the principles of options and renewable indexes. The effectiveness and attractiveness of the proposed instrument, referred to as the Wind-Indexed Option (WInd-Op), are evaluated with real data from the Brazilian sector through an equilibrium setup. We show that Solar Power Companies (SPCs) can be relevant candidates to back these derivatives. Additionally, when compared to the traditional put-and-call options as a benchmark, results indicate that the equilibrium obtained with the new derivative exhibits a significantly higher traded volume (2.9 times greater), lower premium prices (54.7% lower), and greater welfare gain (2.7 greater).

Research on the mechanism of leader-follower product sales competition based on market access restrictions and forward contract considerations

Market access restrictions have been the focus of attention for various market players, but there are fewer studies on the competitive mechanism of market access restrictions on firms' product sales. This paper investigates the competitive mechanism of leader-follower product sales based on market access restrictions and forward contracts. First, the mechanism of leader-follower sales decisions based on market access restrictions and forward contracts is clarified. Second, it models the forward default risk suffered by followers and the profit rate of leader-follower based on market access restrictions and forward considerations by Bayes' posterior probability method. Moreover, it severely explores the impact mechanisms of the degree of market access restrictions on leaders and followers when followers do not adopt and adopt forwards and makes a simulation analysis. The results show that: (i) When followers do not employ forward contracts, the less restrictive degree of market access increases the supply of leaders, and leaders' competition for product sales further leads to a decrease in the provision of followers. (ii) When followers use forwards, leaders' and followers' expected discounted profit rates decrease with the total supply of products in the market increases. (iii) If the degree of market access restrictions is low, the followers suffer an increased forward default risk, resulting in their rate of revenue decrease. The findings of this paper have some practical significance and policy implications for the regulator to adjust the degree of market access restriction in each restricted access area, to establish a reasonable and efficient competitive environment for product sales, as well as for firms to choose the optimal way of competing for product sales.

Valuation of forward contract price in energy markets described by a fuzzy-stochastic model and mathematical algorithms: a case study of the PJM Western Hub Real-Time Peak market

Valuation of forward contract price in energy markets described by a fuzzy-stochastic model and mathematical algorithms: a case study of the PJM Western Hub Real-Time Peak market

A multi-criteria decision-making model to determine the optimal share of variable renewable energy sources in a wholesale electricity market

In recent years, the development of renewable energy technologies has gotten increasing attention due to the realization of cleaner production and high energy efficiency. Therefore, the proportion of these resources in electricity production has experienced a dramatic increase. However, with the features of intermittent nature and merit order effects, it is challenging to effectively optimize the integration of renewable energy sources (RES) into the electricity markets. To deal with the complex problem of selecting the proportionate share of non-dispatchable RES for participation in the market, this paper establishes a multi-criteria decision-making (MCDM) framework, which combines the Analytic Hierarchy Process (AHP) and Simple Additive Weighting (SAW). Five criteria are defined and the corresponding mathematical model is solved by the proposed AHP-SAW method. In this way, the optimal share of renewable resources for participation in the wholesale market can be determined based on the desired criteria. Also, to compare the results obtained by the AHP-SAW method, the criteria weights are determined by Shannon entropy, and the problem is solved by the TOPSIS method. To assert the effectiveness of the proposed framework, two case studies are done. According to the results, by increasing the RES penetration level, the average price of the market decreases mildly while price volatility increases significantly . Also, the amount of forward contracts is decreased when the RES share increases. Moreover, the results show that a high amount of RES is not necessarily desirable and depends on the type of renewable resources and policymakers' priorities. The results for systems 1 and 2 indicate that the maximum allowable amount of RES are 85.359 and 38.24 MW, respectively.

STUDY ON COMMODITY TRADING ANALYSIS AND INVESTOR’S PERCEPTION

Commodity trading is as old as human civilization and one of the earliest economic pursuits of mankind. Over the centuries, commodity trading has evolved from the barter system to spot markets to derivatives markets. In barter system, goods were exchanged between two parties with matching and opposite needs (for example, bags of wheat were exchanged for cattle). Over a period of time, commodities brought from distant places were exchanged for gold and silver. With the introduction of Money as a medium of exchange, there was a paradigm shift in commodity trading with the value of commodity being expressed in monetary terms and trading in commodities was conducted mainly through the medium of currency. Commodity spot markets evolved in many places and the counterparties met at these common places where goods were brought for immediate sale and delivery at the market price decided by the demand and supply forces. In commodity spot markets, traders sell goods such as rice for immediate delivery against cash. At some stage, counterparties started entering into agreements to deliver commodities (e.g.: wheat) at a specified time in future at a price agreed today. These forward contracts, more often than not, were not honored by either of the contracting parties due to price changes and market conditions. A seller pulled out of the contract if the spot price was more profitable for him than the contracted price. A buyer also backed out from executing the contract on maturity if he was able to get the commodity at a cheaper price from the spot market. Futures emerged as an alternative financial product to address

Procurement portfolio management for resilient supply chains: value of information for risk averse decision making

AbstractIn this study, we investigate the replenishment decisions for firms that rely on multiple sources of supplies, including regular forward contracts, option contracts, and the spot market. Our research aims to tackle the challenges arising due to supplier disruptions and the volatility of spot market prices that are correlated with these disruptions. We develop and solve multi-stage stochastic programming models that incorporate demand and supplier disruption information updates, while considering both risk-neutral and risk averse (CVaR) objectives. These models assist organizations with varying risk attitudes in achieving maximum performance by optimally selecting a procurement portfolio based on the availability and quality of updated information. Through analytical solutions and extensive numerical studies, our findings offer novel insights to organizations and policymakers, empowering them to enhance their supply chain resilience during critical supply disruption situations. Therefore, this research has broader implications and aligns with the multiple sustainability objectives outlined in the Sustainable Development Goals (SDGs).