Forward Prices Research Articles

Self-generation of Electricity, Assessment and Optimization Under the New Support Schemes in Colombia

This paper propose a method to evaluate a electricity project self-generation with renewable energy sources under the new Colombian normative framework and it includes the uncertainty than characterized this type of projects. An economic optimization model was designed to evaluate the self-generation project management; the cash discount flow method is implemented with Monte Carlo Simulation (MCS). A Radial Basis Function Network with causal variables (historic and forecast) was used for modeling the forward price and MCS for the system generation and the output of the economic model. The case study that was developed in shopping centers considering the possibilities of electricity generation surplus export and, response demand programs. The applicability of the proposed economic model is shown, through which the scenarios in which the project is viable are determined.

Contractual Farming Arrangements, Quality Control, Incentives, and Distribution Failure in Kenya's Smallholder Horticulture: A Multivariate Probit Analysis

ABSTRACTWith the rapid growth of horticultural value chains, the use of contractual farming arrangements, strategies of quality control (farm audits/crop rejections), pricing incentives, and distribution efficiencies (crop collection arrangements) are increasingly breaking market barriers, for example, private standards, certification, traceability, and supply reliability in developing countries. Cognizant of market access, farm produce value, sustainable production, and reduction of postharvest losses, this paper investigated whether farm size, schooling, producer price, farm visits, and social capital networks condition these strategies. The results show that use of written contracts is conditioned by farm sizes, more extension, and number of producer groups (PGs) while farm certification is positively predicted by farm sizes, more extension, number of sellers in the village and seasons with the same buyer. However, certification is less responsive to producer prices. Crop rejections are predicted to be less depending on a farmer's education, number of PGs, and the producer price but are more likely to increase the more the number of sellers. Further, the results show that a forward pricing incentive is highly correlated with higher producer prices, more extension, and number of seasons with the same buyer. Finally, uncollected produce at harvest is likely to decrease with farm sizes, more education and extension, higher producer price, number of PGs, and seasons with the same buyer but is more likely to increase the higher the number of sellers. Implications are made. [EconLit citations: L14; Q13].

Discretisation-Invariant Swaps

We derive a general multivariate theory for realised characteristics of `model-free discretisation-invariant swaps', so-called because the standard no-arbitrage assumption of martingale forward prices is sufficient to derive fair-value swap rates for such characteristics which have no jump or discretisation errors. This theory underpins specific examples for swaps based on higher moments of a single log return distribution where exact replication is possible via option-implied `fundamental contracts' like the log contact. The common factors determining the S&P 500 risk premia associated with these higher-moment characteristics are investigated empirically at the daily, weekly and monthly frequencies.

A non-parametric structural hybrid modeling approach for electricity prices

We develop a stochastic model of zonal/regional electricity prices, designed to reflect information in fuel forward curves and aggregated capacity and load, as well as zonal or regional price spreads. We use a non-parametric model of the supply stack that captures heat rates and fuel prices for all generators in the market operator territory, combined with an adjustment term to approximate congestion and other zone-specific behaviour. The approach requires minimal calibration effort, is readily adaptable to changing market conditions and regulations, and retains sufficient tractability for the purpose of forward price calibration. The model is illustrated for the spot and forward electricity prices of the PS zone in the PJM market, and the set of time-dependent risk premiums are inferred and analysed.

PRICING AND HEDGING OF ENERGY SPREAD OPTIONS AND VOLATILITY MODULATED VOLTERRA PROCESSES

We derive the price of a spread option based on two assets which follow a bivariate volatility modulated Volterra (VMV) process dynamics. Such a price dynamics is particularly relevant in energy markets, modeling for example the spot price of power and gas. VMV processes are in general not semimartingales, but contain several special cases of interest in energy markets, like for example continuous-time autoregressive moving average processes. Based on a change of measure, we obtain a pricing expression based on a univariate Fourier transform of the payoff function and the characteristic function of the price dynamics. Moreover, the spread option price can be expressed in terms of the forward prices on the underlying dynamics assets. We compute a linear system of equations for the quadratic hedge for the spread option in terms of a portfolio of underlying forward contracts.

THE EVALUATION OF MULTIPLE YEAR GAS SALES AGREEMENT WITH REGIME SWITCHING

A typical gas sales agreement (GSA), also called a gas swing contract, is an agreement between a supplier and a purchaser for the delivery of variable daily quantities of gas, between specified minimum and maximum daily limits, over a certain number of years at a specified set of contract prices. The main constraint of such an agreement that makes them difficult to value is that in each gas year there is a minimum volume of gas (termed take-or-pay or minimum bill) for which the buyer will be charged at the end of the year (or penalty date), regardless of the actual quantity of gas taken. We propose a framework for pricing such swing contracts for an underlying gas forward price curve that follows a regime switching process in order to better capture the volatility behavior in such markets. With the help of a recombining pentanomial tree, we are able to efficiently evaluate the prices of the swing contracts, find optimal daily decisions and optimal yearly use of both the make-up bank and the carry forward bank at different regimes. We also show how the change of regime will affect the decisions.

Empirical Pricing Performance on Long-Dated Crude Oil Derivatives: Do Models with Stochastic Interest Rates Matter?

Does modelling stochastic interest rates beyond stochastic volatility improve pricing performance on long-dated crude oil derivatives? To answer this question, we examine the empirical pricing performance of two forward price models for commodity futures and options: a deterministic interest rate-stochastic volatility model and a stochastic interest rate-stochastic volatility model. Both models allow for a correlation structure between the futures price process, the futures volatility process and the interest rate process. By estimating the model parameters from historical crude oil futures prices and option prices, we find that stochastic interest rate models improve pricing performance on long-dated crude oil derivatives, with the effect being more pronounced when the interest rate volatility is relatively high. Several results relevant to practitioners have also emerged from our empirical investigations. With regards to balancing the trade-off between precision and computational effort, we find that two-factor models would provide good fit on long-dated derivative prices thus there is no need to add more factors. We also find empirical evidence for a negative correlation between crude oil futures prices and interest rates.

An Equilibrium Model for Spot and Forward Prices of Commodities

An Equilibrium Model for Spot and Forward Prices of Commodities

Model Uncertainty in Commodity Markets

Agents who acknowledge that their models are incorrectly specified are said to be ambiguity averse, and this affects the prices they are willing to trade at. Models for prices of commodities attempt to capture three stylized features: seasonal trend, moderate deviations (a diffusive factor), and large deviations (a jump factor) both of which mean-revert to the seasonal trend. Here we model ambiguity by allowing the agent to consider a class of models absolutely continuous w.r.t. their reference model, but penalize candidate models that are far from it. We show that the buyer (seller) of a forward contract introduces a negative (positive) drift in the dynamics of the spot price and enhances downward (upward) jumps so the prices they are willing to trade at are lower (higher) than that of the forward price under ${\mathbb{P}}$. When ambiguity averse buyers and sellers employ the same reference measure they cannot trade because the seller requires more than what the buyer is willing to pay. Finally, we obser...

International Real Estate Review

The paper studies the residential micromarket of the Gurgaon region of the Delhi National Capital Region in India, to identify the key determinants of real estate investment selection and perform empirical analysis of property prices. A primary survey suggests that the goodwill of the developer is the most important factor for investors in the case of residential properties that are under construction (forward projects). Other factors include location, amenities, project density and construction quality. These factors enjoy almost equal importance in selecting completed projects (spot projects). The factor information can be used to construct property quality rating classes. High risk adjusted returns are provided by high quality spot projects and low quality forward projects. A long run equilibrium relationship is observed between spot projects and forward prices with the former playing the lead role. Gross domestic product and non-food bank credit are the macroeconomic variables that can predict property prices. The highest pre-tax internal rate of return is observed for forward projects in the first quarter holding itself while for spot projects, it is around the eighth quarter. The research has implications for property developers, real estate investors and market regulators. The study contributes to the real estate investment literature on emerging markets.

Arbitrage-Free Shifting of Price Forward Curves - an Effi cient and Generic Algorithm

The most basic and important object for any company trading energy commodities is a so-called Price Forward Curve, or PFC, providing prices in a fine granularity for a future period of time. Clearly, the PFC must be free of arbitrage with respect to the relevant set of forward prices at all times as it is used very frequently and in many different places in a company. Thus, there is need for a fully generic and efficient algorithm producing this arbitrage-free forward curve - a subject yet uncovered by the literature. The algorithm presented in this paper uses techniques from linear algebra and we demonstrate how typical problems and issues from practice such as complicated calendar arithmetics, incorporating bid/ask prices and interplay with Monte-Carlo frameworks are covered. Furthermore, as a by-product, the algorithm produces matrices that allow to change freely between two fundamental representation of the energy market at hand - one being the space of observed forward products, the other being a synthetic world that eases greatly calculations such as pricing, hedging and risk management.

Forward pricing in the shipping freight market

In this paper, we derive the price of the forward freight contract using spot-forward relationship framework. We base our pricing on six different stochastic models which can capture many stylized facts of spot freight rates such as heavy-tailed logreturns, time-varying volatility and mean reversion. The models are analytically tractable which allows for pricing of forwards. We also examine the shape of forward curve for all continuous-time forward pricing formulas and find various shapes being the combination of fixed and stochastically dependent terms. Finally, this paper discusses the effect of different time to delivery and the maturity effect to the forward curve.

Pricing of forwards and other derivatives in cointegrated commodity markets

We analyze cointegration in commodity markets, and propose a parametric class of pricing measures which preserves cointegration for forward prices with fixed time to maturity. We present explicit expressions for the term structure of volatility and correlation in the context of our spot price models based on continuous-time autoregressive moving average dynamics for the stationary components. The term structures have many interesting shapes, and we provide some empirical evidence from refined oil future prices at NYMEX defending our modeling idea. Motivated from these results, we present a cointegrated forward price dynamics using the Heath–Jarrow–Morton approach. In this setting, the concept of cointegration is extended to what we call cointegration in the limit, which is an asymptotic form of the notion. The Margrabe formula for spread option prices is shown to hold, with an explicit plug-in volatility. We present several numerical examples showing that cointegration leads to significantly cheaper spread options compared to the complete market case, where cointegration disappears with respect to the pricing measure.

Is the Discounted Cash Flow Model a Biased Estimator of Stock Returns?

The Discounted Cash Flow Model (DCF) and the Capital Asset Pricing Model (CAPM) are often used to determine an appropriate return on equity for regulated utilities. However, both the CAPM and the DCF will sometimes produce unrealistically high or low results during times of excess market volatility.In the 40 years since the initial publication of the CAPM, there have been numerous criticisms of the model in the financial literature. Studies have suggested that future returns on stocks with a high earnings/price ratio are higher than predicted by the CAPM (Basu, 1977); that average returns on stocks with a low market capitalization are higher than predicted by the CAPM (Banz, 1981); that high debt-equity ratios are associated with returns higher than their market betas (Bhandari, 1988); that stocks with high book-to-market equity ratios have high average returns which are not captured by their betas (Statman, 1980 and Rosenberg, Reid, and Lanstein, 1985); that non-systematic risk has a significant effect on excess returns (Lintner, 1965b); and that the expected return-beta relationship is not fully consistent with empirical observations (Fama and MacBeth, 1973).We review the literature concerning the CAPM and DCF models and briefly discuss the arguments of the proponents of each model.We use data from 70 electric, natural gas, and water utility stocks and separately estimate a one-year forward market price for the years 2001-2011. We estimate the expected return for each stock using the following models: the CAPM; two single-stage DCF models (one based on dividend growth estimates and one based on earnings growth estimates); two three-stage DCF models (one based on dividend growth estimates and one based on earnings growth estimates); and the Capital Appreciation plus Income (CA I) (stock price change plus dividends) model.We then evaluate the CAPM, DCF, and CA I models using a sum of the squared differences method.

An Online Appendix to: 'Violations of Uncovered Interest Rate Parity and International Exchange Rate Dependences'

This online appendix to "Violations of Uncovered Interest Rate Parity and International Exchange Rate Dependences" includes the copula density function for the Clayton-Frank-Gumbel mixture copula and the details for the likelihood based estimation of the multivariate currency basket log returns. Currency carry trade high and low interest rate baskets over time are shown. Further results for the copula parameter fits and associated dependence measures are then analysed. A description of the method used to calculate the confidence intervals for the covariance regression is given. Finally, the method used to interpolate the one month forward price curve is explained.The paper "Violations of Uncovered Interest Rate Parity and International Exchange Rate Dependences" to which these Appendices apply is available at the following URL: http://ssrn.com/abstract=2638163

Commodity risk hedging through risk sharing: reengineering Islamic forwards

In this paper, we study the possibility of using Islamic forwards, which are commonly known as salam contracts, to hedge commodity risk, while respecting the principle of risk sharing. Results show that this can be achieved by considering a stochastic forward price. In addition, splitting the deal into many salam contracts that have the same characteristics with regard to size and delivery date almost removes the zero-sum structure of salam's payoffs. To compute the number of needed contracts, we use a Monte Carlo simulation. The estimated number is large and increases with price volatility. Nevertheless, when this volatility exceeds a certain threshold, keeping one contract becomes the optimal solution for risk sharing. The relatively large number of needed contracts renders the splitting impracticable. Therefore, it is reduced to a number that both parties of the deal can agree upon. Finally, this hedging strategy is only possible within a mutual risk-sharing arrangement, because the price in salam must be specified; otherwise, the contract is void.

Oil and Gas Exploration Valuation and the Value of Waiting

The timing flexibility of investments in oil and gas assets can potentially add value. In this article, we examine the value of waiting in exploration projects and propose a real option–based valuation method using least-squares Monte Carlo simulation. We show that the dynamics of the oil and gas prices have a large impact on the value of the option to wait, especially for projects with long lead times and durations. The uncertainty in the forward price curve is modeled using a two-factor stochastic price process. The article also presents the valuation method in the form of MATLAB functions and routines that can be used as an efficient test and analysis platform using the industry-standard input formats.

Heterogeneous beliefs, regret, and uncertainty: The role of speculation in energy price dynamics

This paper proposes to investigate the impact of financialization on energy markets (oil, gas, coal, and electricity European forward prices) during both normal times and periods of extreme fluctuation by using an original behavioral and emotional approach. With this aim, we propose a new theoretical and empirical framework based on a heterogeneous agents model in which fundamentalists and chartists co-exist and are subject to regret and uncertainty. We find significant evidence that energy markets are composed of heterogeneous traders who behave differently depending on the intensity of the price fluctuations and the uncertainty context. In particular, energy prices are governed primarily by fundamental and chartist agents that are neutral to uncertainty during normal times, whereas these prices face irrational chartist investors averse to uncertainty during periods of extreme fluctuations. In this context, the recent surge in energy prices can be viewed as the consequence of irrational exuberance. Our new theoretical model is suitable for modeling energy price dynamics and outperforms both the random walk and the ARMA model in out-of-sample predictive ability.

English

The purpose of this paper is twofold: First, we look at the fundamentals of spot prices of corn and wheat and analyse several measures of dispersion, arguing that the use of the standard deviation of prices is more instructive for regulators and world food organisations than volatility, that is, standard deviation of returns. Second, we look at alternative predictors of corn and wheat spot prices and exhibit that the average value of the forward curve introduced by Borovkova and Geman (2006) performs better than individual forward prices to forecast spot prices at future dates.

Fast Approximate Pricing for FX Target Redemption Forwards

We use the ideas of American Monte Carlo methods to develop a fast approximate pricing of FX target redemption forwards. One possible application for this are XVA simulations. We give numerical examples using the QuantLib pricing library.