Spot Contracts Research Articles

Stochastic Modelling and Pricing of Electricity and Related Markets' Contracts with Local Stochastic Delayed and Jumped Volatilities

In this paper we study stochastic models for electricity, gas and temperature markets' contracts with delay and jumps. The basic products in these markets are spot, futures and forward contracts, swaps and options written on these. We concentrate our study on pricing of these kind of contracts. We also study optimal control of stochastic differential delay equations (SDDEs) with jumps and its applications in energy markets and economics.

The Dynamics of Advertising and Contract Choice on the Champagne Wine Market

AbstractThere are two main players in the Champagne wine industry; grape growers and Champagne houses. The former grow grapes and either produce their own Champagne wine or sell their fruit to Champagne houses. The latter only produce Champagne wine and do not grow grapes. However, Champagne houses invest heavily in advertisements to establish and maintain their brand's reputation. The grape market is characterized by the dominance of long-term supply contracts over spot contracts. Drawing on various theoretical models we suggest that the Champagne houses' advertising strategy and its associated positive externalities (spillover effects) on grape growers is a way of stabilizing vertical relations, i.e., keeping grape growers from producing Champagne wine themselves and thus maintaining a certain degree of monopoly power. (JEL Classification: C78, M37, D86, L14, Q18)

Incentive Provision When Contracting is Costly

We analyze optimal incentive contracts in a model where the probability of court enforcement is determined by the costs spent on contracting. We show that contract costs matter for incentive provision, both in static spot contracts and repeated game relational contracts. We find that social surplus may be higher under costly relational contracting than under costless verifiable contracting, and show that there is not a monotonic relationship between contracting costs and incentive intensity. In particular we show that an increase in contracting costs may lead to higher-powered incentives. Moreover we formulate hypotheses about the relationship between legal systems and incentive provision, specifically the model predicts higher-powered incentives in common law than in civil law systems.

Integrated Model for Financial Risk Management in Refinery Planning

An integrated model based on two-stage stochastic programming is developed for operational planning and financial risk management of a refinery. Downside risk, which rationally quantifies financial risk, is selected as the objective function to be minimized. Subsequently, the contract sizes and the operational plan are optimized on the basis of the developed model and the price scenarios. A case study shows that financial risk can be substantially reduced by diversifying suppliers with spot contracts and by cross-hedging with futures contracts. The former approach is particularly effective for low-target profits, whereas the latter is effective for relatively high-target profits. Furthermore, the target profit is closely related to risk propensity. A high-target profit set in a refinery reflects risk-taking behavior, whereas a low-target profit indicates a risk-averse attitude. The developed model is beneficial for refineries because it aids in decision-making on operational and financial strategies.

A Brief Study of Voluntary Carbon Markets, Recent and Future Trends with Special Focus on India

For several decades widespread concern has surfaced over the increase in disruptive anthropogenic processes and their role in radically altering the environment and ecosystems. With the advent of the Kyoto Protocol the world witnessed a dramatic intensification of interest in Climate Change Mitigation. Although this momentum was initially brought about to meet compliance targets, it soon gave way to private businesses, NGOs, investors and eventually individuals who took the initiative to change their prodigal ways. Parallel to the CDM projects market, runs another smaller yet burgeoning Voluntary Carbon Market. Not bound by the rigorous procedures and high transaction costs, the Voluntary Carbon Market empowers a wider variety of organizations and individuals to take part in the mitigation process and build a sustainable future. Currently the Voluntary Carbon Market is estimated at $330 million, trading volumes of 65 million tonnes of CO2 with a growth rate of 240% in just one year. Experts predict this to grow exponentially to volumes of up to 1400 million tonnes of CO2 being traded by 2020. (Hamilton May 2008) This report deals with issues pertaining to the Voluntary Carbon Market and its potential in the coming years. It discusses topics of additionality, validation and verification standards and registries. It also discusses recent trends and creates a price prediction model. It also seeks to answer how it will play a key role in a country like India. It analyzes the relationship between regulated and voluntary markets. Finally it analyzes the global scenario and how it will change with the growing focus on Climate Change. CONTENTS: Introduction 1. Regulatory Market 2. Market Overview 3. Voluntary Market 3.1 Key Elements of Offset Transactions 3.1.1 Additionality 3.1.2 Baselines 3.1.3 Leakage 3.1.4 Permanence 3.1.5 Project Types 3.1.6 Offset Standards 3.1.7 Registries and Retirement 3.1.8 Spot and Future Contracts 4. Prices of the Future 4.1 Type of Project 4.2 Type of Seller 4.3 Location of Project 4.4 Type of Standard 5. The Indian Context 5.1 Carbon Disclosure Project 5.2 Future Regulatory vs. Future Voluntary Conclusion

Emerging Market Currency Excess Returns

We consider the excess return from 20 internationally tradable emerging market (EM) currencies against the US dollar. It has two contributions. First, we document stylized facts about EM currencies. EM currencies have provided significant equity-like excess returns against major currencies, but with low volatility. Picking EM currencies with a relatively high forward premium raises the portfolio return substantially. Second, our calculation incorporates institutional features of the foreign exchange market, such as lags in settling spot contracts, FX swaps, and bid/offer spreads. Transaction costs arising from bid/offer spreads are less than one-fifth of what is typically presumed in the literature. (JEL C58, F31, G15)

Emerging Market Currency Excess Returns

This is a descriptive paper on the excess return from 20 internationally tradable emerging market (EM) currencies. It has two contributions. First, we document stylized facts about EM currencies. For the period starting in the second half of the 1990s and including the two major crises (the 1997 East Asian crisis and the recent Lehman shock), we find that the basket of EM currencies has provided significant equity-like excess returns against major currencies, but with low volatility. After confirming that the forward premium puzzle is less prevalent for EM currencies than for major currencies, we find that the forward premium for majors, rather than that for EM currencies, is a better predictor of the EM excess return. Second, our calculation takes into account institutional features of the foreign exchange market such as bid/offer spreads, FX (foreign exchange) swaps, and lags in settling spot contracts.

Costly Contracting in a Long-Term Relationship

We examine a model of contracting where parties interact repeatedly and can contractat any point in time, but writing enforceable contracts is costly. A contract can describe contingencies and actions at a more or less detailed level, and the cost of writing a contract is proportional to the amount of detail. We consider both formal (externallyenforced) and informal (self-enforcing) contracts. The presence of writing costs has important implications both for the optimal structure of formal contracts, particularly the tradeoff between contingent and spot contracts, and for the interaction between formal and informal contracting. Our model sheds light on these implications and generates a rich set of predictions about the determinants of the optimal mode of contracting.

New No-arbitrage Conditions and the Term Structure of Interest Rate Futures

Interest rate futures are basic securities and at the same time highly liquid traded objects. Despite this observation, most models of the term structure of interest rate assume forward rates as primary elements. The processes of futures prices are therefore endogenously determined in these models. In addition, in these models hedging strategies are based on forward and/or spot contracts and only to a limited extent on futures contracts. Inspired by the market model approach of forward rates by Miltersen, Sandmann, and Sondermann (J Finance 52(1); 409–430, 1997), the starting point of this paper is a model of futures prices. Using, as the input to the model, the prices of futures on interest related assets new no-arbitrage restrictions on the volatility structure are derived. Moreover, these restrictions turn out to prevent an application of a market model based on futures prices.

Multivariate discount weighted regression and local level models

The technique of multivariate discount weighted regression is used for forecasting multivariate time series. In particular, the discount regression model is modified to cater for the popular local level model for predicting vector time series. The proposed methodology is illustrated with London metal exchange data consisting of aluminium spot and future contract closing prices. The estimate of the measurement noise covariance matrix suggests that these data exhibit high cross-correlation, which is discussed in some detail. The performance of the proposed model is evaluated via an error analysis based on the mean of squared forecast errors, the mean of absolute forecast errors and the mean of absolute percentage forecast errors. A sensitivity analysis shows that a low discount factor should be used and practical guidelines are given for general future use.

Dynamic Processes of Social and Economic Interactions: On the Persistence of Inefficiencies

An economy with a finite number of agents and a finite number of states is considered. An exogenous institutional rule prescribes which moves from one state to another are feasible to each coalition. At each time, an agent is called to act with some exogenous probability, and he chooses a coalition, a feasible new state to move the economy to, and side payments between the agents in the coalition. The setup can be applied to various dynamic processes of social and economic interactions such as legislative bargaining, coalition formation, or exchange economies. Whenever agents are unable to write long‐term contracts, but are otherwise unconstrained both in their ability to write arbitrary spot contracts and in their ability to collude, there can be long‐run inefficiencies (with cycles or inefficient steady states). However, when agents are sufficiently patient, the initial state from which the process starts plays no role in the long run. Moreover, when there exists an efficient state that is free of negative externalities (in the sense that a move away from that state does not hurt the agents whose consent is not required for the move), the system must converge to this efficient state in the long run. It is thus more important to design institutions guaranteeing the existence of an efficient negative externality–free state than to implement a fine initialization of the process.

Short-Selling Restriction, Price Squeeze, and Bond Futures Price Manipulation: A Theoretical and Empirical Analysis

In an emerging futures market with short-selling restrictions on spot contracts, low margin requirements on futures contracts, and weak corporate governance, price squeeze and manipulation may occur. Price manipulators would be able to inflate both spot and futures prices and lead to the instability of the futures and spot markets. The Chinese government bond futures market, the first and the only financial futures ever existed in China, provides an opportunity to investigate the above conjecture. Using a unique data set including all contract series issued and traded between 1993 and 1995, this paper documents evidence of price squeeze and manipulation. Our evidence indicates that prior to the maturity month of government bond futures, price manipulators, taking the advantage of short-selling restrictions in the government bond spot market and very low margin requirements in the government bond futures, accumulate a significant amount of long positions for several selected issues without the intention to offset, which eventually leads to the collapse of the Chinese government bond futures market.

The Advantage of Employing Workers with Short Time Perspectives

This paper examines labor contracts as a form of insurance contracts. It assumes that workers are risk averse with the time perspective (or planning period) of a worker combining a period of T distinct spells t, with length of a spell being the same for all workers (a spell might be a year for example). Workers are assumed to differ only according to their time perspective: For example some workers planning period may consist of only one spell (T=1), while for others it may be three spells (T=3). The analysis starts with the assumption that workers are hired on a neoclassical spot contract at the beginning of each spell . Then it shows that, if workers objective is to maximize the sum of their incomes over all spells in their planing period, income risk that derives from the uncertainty of employment caused by stochastical business cycles in each spell will be more threatening to workers with a shorter time perspective T than to those with a longer time perspective. Therefore, if a firm offers an institutionalized contract that bears no employment risk and covers the worker's individual planning period T, the worker´s willingness to pay risk premiums by wage concessions decreases, the longer is his planning period. On this pure risk theoretical point of view, the firm will prefer workers with short individual planning periods in order to maximize their insurance premiums. Thus this paper contradicts the common argument that long term contracts are advantageous to firms.

The Relationship Between Spot and Futures Index Contracts after the Introduction of Electronic Trading on the Johannesburg Stock Exchange

The objective of this paper is to analyze the interrelationship between the all share, gold and industrial indexes of the Johannesburg Stock Exchange and the corresponding index futures contracts traded on the South African Futures Exchange after the introduction of electronic trading. For the all share and industrials contracts, we find quicker information transmission between the spot and futures markets after the introduction of electronic trading. In addition, the contemporaneous correlation between the markets increases and the size and asymmetry of the volatility spillovers is reduced. For the gold contract, we find slower information transmission after the introduction of electronic trading, but this result may be biased by the fact that the gold contract was discontinued.

Dynamic Processes of Social and Economic Interactions: On the Persistence of Inefficiencies

An economy with a finite number of agents and a finite number of states is considered. An exogenous institutional rule prescribes what moves from one state to another are feasible to each coalition. At each time an agent is called to act with some exogenous probability, and he chooses a coalition, a feasible new state to move the economy to, and side-payments between the agents in the coalition. The setup can be applied to various dynamic processes of social and economic interactions such as legislative bargaining, coalition formation or exchange economies. Whenever agents are unable to write long-term contracts, but agents are otherwise unconstrained both in their ability to write arbitrary spot contracts and in their ability to collude, there can be long-run inefficiencies (with cycles or inefficient steady states). However, when agents are sufficiently patient, the initial state from which the process starts plays no role in the long-run. Moreover, when there exists an efficient state that is negative-externality-free (in the sense that a move away from that state does not hurt the agents whose consent is not required for the move), then the system must converge to this efficient state in the long-run. It is thus more important to design institutions guaranteeing the existence of an efficient-negative-externality-free state than to implement a fine initialization of the process.

Self-enforcing transactions: reciprocal exposure in fisheries

This article tests the importance of transaction-specific investments in determining contract choice in the intermediate market for raw fish. The analysis uses information from a large sample of (implicit) contracts between fishers and processors in British Columbia for the 1988 fishing season. These contracts are of two general types: spot-market arrangements, and ex ante agreements. With a spot contract, buyers and sellers of fish seek one another after incurring seasonal investments (e.g., vessel maintenance, crew, processing facilities, etc.); there is no prior agreement for exchange, nor is there an agreement the relationship will continue beyond the transaction.' With ex ante agreements, the parties agree to trade with one another, perhaps exclusively, prior to either party incurring seasonal start-up costs. These agreements typically have nonprice compensation mechanisms such as financing of vessels by processors, and

Intertemporal Risk in the Foreign Currency Futures Basis

AbstractWe investigate covariation of payoffs from spot and futures positions in foreign currency markets. The weights in a hedged position are determined by the prices of futures and spot contracts and by foreign and domestic interest rates. Evaluating this hedged position using an intertemporal asset‐pricing model leads to a testable equilibrium model for the time series evolution of the futures basis. Systematic intertemporal risk will be proportional to the conditional covariance of the basis with a generalized discount factor. Empirical implementation uses a conditional capital‐asset‐pricing model (CAPM) in which both the quantity and the price of covariance risk are free to vary over time. However, for this application, the estimated intertemporal risk is insignificantly different from zero, the risk in the futures position offsets that in the spot, providing an effective hedge.RésuméLa covariance des recettes découlant des positions à terme et au comptant prises sur les marchés des devises constitue l'objet principal de cette étude. Les pondéra‐tions utilisées pour la position couverte sont fixées à partir des prix des contrats à terme et des contrats au comptant d'une part et à partir des taux d'intérět étranger et national de l'autre. La position couverte ainsi définie peut alors ětre évaluée à l'aide d'un modèle temporel d'évaluation des actifs financiers. Ceci rend possible la formualtion d'un modèle d'équilibre de l'évolution de la série temporelle de la «base» (basis) sur le marché à terme vérifiable empiriquement. Dans cette formulation, le risque systématique temporel est proportionnel à la covariance conditionnelle de la base ajustée à l'aide d'un facteur d'actualisation généralisé. La vérification empirique de ce modèle utilise un modèle conditionnel d'évaluation des actifs financiers dans lequel le prix ainsi que l'amplitude du risque de covariance peuvent varier librement sur le temps. Cependant, dans cette application, le risque temporel estimé n'est pas significativement différent de zéro, le risque de la position à terme étant contrebalancé par celui de la position au comptant dans le contexte d'une couverture parfaite.

Institutional Solutions to the Principal-Agent Problem in African Health Care

Free markets for health care in Africa do not function properly, in that patients exhibit willingness to pay for health care and yet practitioners are unable to sell their services. It is widely acknowledged that health markets everywhere are troubled with imperfect information. Therefore it is no surprise that free markets and spot contracts do not lead to an efficiently functioning market for health care. When issues of agency are not resolved we find practitioners specializing in the sale of pharmaceuticals but not using their skills as diagnosticians. Mechanisms that can reduce agency cost are beneficial to both patients and practitioners. This paper draws on theory and empirical evidence to examine what institutions are necessary to solve the problems of imperfect information in this context. We dismiss government regulation because the regulatory capacity does not exist in most African countries. Theory suggests that self--regulation by professional bodies should arise as privatization continues. Empirical evidence, however, suggests that this conclusion is overly-optimistic. On the other hand, referral networks perform much the same function but do not require centralized control. The most successful institution for the delivery of quality medical care in Africa is that of independent, pre-existing value-based organizations (missions) and we suggest their choice of institutional form has contributed to their success.

Filamentation of a laser beam interacting with an underdense plasma and its coupling to stimulated Brillouin scattering

The nonlinear behavior of a single laser beam with power above critical is investigated in three spatial dimensions without the paraxial approximation. In the case where stimulated Brillouin scattering (SBS) is suppressed by strong damping, it is found numerically that the hot spot contracts spatially in all directions, leading to transverse dimensions smaller than the laser wavelength, even when the ion response is nonlinearly saturated. This contraction leads to the three dimensional collapse of the transverse wave in the absence of nonlinear saturation of the ion response. When the saturation of the ion response is properly retained, a narrow filament forms initially, This filament then appears to be unstable and exhibits violent modulations of the laser wave intensity along the direction of its propagation, leading to a complicated dynamical behavior. In the case of moderate SBS damping, one still observes the initial spatial contraction in all directions and the formation of a narrow channel. SBS then occurs in violent bursts, and does not stop the complex dynamical behavior of the filament.

Bargaining In International Trade Under Exchange‐Rate Uncertainty

AbstractThis paper examines the implications of various contracting alternatives between exporting and importing firms on the volume of international transactions. the contracts that we study are determined in a bargaining situation under exchange‐rate uncertainty. First we look at contracts which entail an ex ante commitment on price and quantity of exports without the possibility of renegotiation ex post. Second, spot contracts, i.e., the price and the quantity of exports are negotiated after the exchange the rate is known. A third type of contracts consists of ex ante commitment and ex post renegotiation.