Use Of Futures Research Articles

Carbon dioxide removal and the futures market

Futures contracts are exchange-traded financial instruments that enable parties to fix a price in advance, for later performance on a contract. Forward contracts also entail future settlement, but they are traded directly between two parties. Futures and forwards are used in commodities trading, as producers seek financial security when planning production. We discuss the potential use of futures contracts in Carbon Dioxide Removal (CDR) markets; concluding that they have one principal advantage (near-term price security to current polluters), and one principal disadvantage (a combination of high price volatility and high trade volume means contracts issued by the private sector may cause systemic economic risk). Accordingly, we note the potential for the development of futures markets in CDR, but urge caution about the prospects for market failure. In particular, we consider the use of regulated markets: to ensure contracts are more reliable, and that moral hazard is minimised. While regulation offers increased assurances, we identify major insufficiencies with this approach—finding it generally inadequate. In conclusion, we suggest that only governments can realistically support long-term CDR futures markets. We note existing long-term CDR plans by governments, and suggest the use of state-backed futures for supporting these assurances.

Measuring volatility in the Indian commodity futures

Like the financial futures, the use of commodity futures is also considered to be more generic as it benefits larger stakeholders and the economy as well. The increasing participation in the commodities market by the investors is alarming for their risk bearing capacity where the benefit of leverage in the futures trading is attracting more number of participants. Thereby, the increase in commodity futures trading has put forth the discussion of uncertainties about their future price movements. Thus, for better mitigation of its price risk, knowing about the fluctuation of asset prices in the commodity futures market is necessary.

Commodity Price Forecasts, Futures Prices, and Pricing Models

Even though commodity-pricing models have been successful in fitting the term structure of futures prices and its dynamics, they do not generate accurate true distributions of spot prices. This paper develops a new approach to calibrate these models using not only observations of oil futures prices, but also analysts’ forecasts of oil spot prices. We conclude that to obtain reasonable expected spot curves, analysts’ forecasts should be used, either alone or jointly with futures data. The use of both futures and forecasts, instead of using only forecasts, generates expected spot curves that do not differ considerably in the short/medium term, but long term estimations are significantly different. The inclusion of analysts’ forecasts in addition to futures, instead of only futures prices, does not alter significantly the short/medium part of the futures curve but does have a significant effect on long-term futures estimations. This paper was accepted by Gustavo Manso, finance.

Pricing the CBOE VIX Futures with the Heston–Nandi GARCH Model

We propose a closed‐form pricing formula for the Chicago Board Options Exchange Volatility Index (CBOE VIX) futures based on the classic discrete‐time Heston–Nandi GARCH model. The parameters are estimated using several sets of data, including the S&P 500 returns, the CBOE VIX, VIX futures prices and combinations of these data sources. Based on the resulting empirical pricing performances, we recommend the use of both VIX and VIX futures prices for a joint estimation of model parameters. Such estimation method can effectively capture the variations of the market VIX and the VIX futures prices simultaneously for both in‐sample and out‐of‐sample analysis. © 2016 Wiley Periodicals, Inc. Jrl Fut Mark 37:641–659, 2017

Short-term Hedging for an Electricity Retailer

A dynamic global hedging procedure making use of futures contracts is developed for a retailer of the electricity market facing price, load and basis risk. Statistical models reproducing stylized facts are developed for the electricity load, the day-ahead spot price and futures prices in the Nord Pool market. These models serve as input to the hedging algorithm, which also accounts for transaction fees. Backtests with market data from 2007 to 2012 show that the global hedging procedure provides considerable risk reduction when compared to hedging benchmarks found in the literature.

Well-Structured Futures and Cache Locality

In fork-join parallelism, a sequential program is split into a directed acyclic graph of tasks linked by directed dependency edges, and the tasks are executed, possibly in parallel, in an order consistent with their dependencies. A popular and effective way to extend fork-join parallelism is to allow threads to create futures. A thread creates a future to hold the results of a computation, which may or may not be executed in parallel. That result is returned when some thread touches that future, blocking if necessary until the result is ready. Recent research has shown that although futures can, of course, enhance parallelism in a structured way, they can have a deleterious effect on cache locality. In the worst case, futures can incur Ω( PT ∞ + tT ∞ ) deviations, which implies Ω ( CPT ∞ + CtT ∞ ) additional cache misses, where C is the number of cache lines, P is the number of processors, t is the number of touches, and T ∞ is the computation span. Since cache locality has a large impact on software performance on modern multicores, this result is troubling. In this article, we show that if futures are used in a simple, disciplined way, then the situation is much better: if each future is touched only once, either by the thread that created it or by a later descendant of the thread that created it, then parallel executions with work stealing can incur at most O ( CPT 2 ∞ ) additional cache misses—a substantial improvement. This structured use of futures is characteristic of many (but not all) parallel applications.

Currency exchange rate risk hedging strategies using MXN/USD MexDer futures contracts

The use of futures contracts to hedge exchange rate risk rapidly gained importance after the Bretton Woods Agreement was abandoned in 1973. However, one of the technical difficulties of using futures contracts is the determination of the optimal hedge ratio that minimises risk. This work studies and compares eight possible hedging strategies to identify the optimal hedge ratio for a long position in US Dollar, from the perspective of a hedger whose currency of interest is the Mexican Peso. Two of the strategies use a constant hedge ratio (a naive 'one-to-one' strategy, and an OLS-based hedge ratio). The other six use bivariate GARCH models, including: a diagonal VECH model; a constant conditional correlation model; and a BEKK model. Results show that the OLS-based strategy outperforms the alternative strategies in terms of volatility reduction as measured by a hedging effective index (HEI), by value at risk (VaR) and conditional VaR (CVaR) criteria.

Forward, future and options on stock exchange market

The main motive of the formation and use of forward contracts and futures, and options, was certainly profit. Making financial markets more efficient, in terms of expanding the range of available financial instruments and reduction in transaction costs, these financial innovations are beneficial for both investors and managers company. Primary purpose of derivatives such as forwards, futures and options is to enable control risks by investitures and primarily from inadequate price trends for all types of assets that could be subject to transactions in financial markets.

The role of speculation in international futures markets on commodity prices

The role of futures contracts on spot prices has been one of the key focus areas of research since the recent surge in commodity prices and increase in the volatility of commodity returns. However, no consensus arises from this literature, and hence it is difficult to link the use of futures contracts in agricultural commodities by non-hedgers and the growing food insecurity within developing countries. The purpose of this paper is to highlight causal relationships from futures contracts to spot prices of underlying assets, namely agricultural commodities. As research that focus on exchange-traded funds do not provide any clear conclusions, we focus on the imbalance between short- and long-open positions, this imbalance being caused by the exchange traded funds’ participation in futures markets. In this paper, we estimate relationships between financial variables including indicators for speculation in futures markets and the returns of cocoa, corn, soybean, wheat, coffee, rice, and sugar on a weekly basis from 1998 to 2013. Significant results lead to Granger-causality tests that in turn validate the hypothesis of a positive impact of speculation in futures markets to returns on the underlying commodities.

Analysis of the Development of Financial Risk Management of the Enterprise in Kazakhstan

In this scientific article based on the study of problems of effective management of financial risks of Kazakhstani companies and KazMunaiGas JSC were identified the main risks, which typical for Kazakhstan's financial market at the present stage of its development, was justified the feasibility of using indicators to measure the level of financial risks on the basis of the comparative analysis based on the VaR methodology, as well as the expediency of the use of futures and options contracts to hedge the financial risks of the companies.

The golden target: analyzing the tracking performance of leveraged gold ETFs

Purpose – The purpose of this study is to understand the tracking errors of leveraged exchange-traded funds (LETFs) on gold and demonstrate improved tracking performance by dynamic portfolios of gold futures. Design/methodology/approach – The author formulates and solves a constrained quadratic minimization problem to construct static replicating portfolios of both leveraged and unleveraged benchmarks in gold; a dynamic constant leveraged portfolio using gold futures is used to track the path of the leveraged gold benchmark. Findings – The results suggest that market-traded LETFs do not track a leveraged position in gold effectively over a long horizon, and the dynamic leveraged futures portfolio achieves lower tracking errors over multiple years. Research limitations/implications – The research informs us that investors should consider alternative portfolios with gold futures, rather than holding a leveraged gold exchange-traded funds to achieve a desired leveraged exposure in spot gold. Originality/value – The main contribution of the study is the use of gold futures to dynamically replicate a gold benchmark with any given leverage ratio and the detailed comparison of the tracking performance of LETFs versus optimal static and dynamic futures portfolios.

Impact of Derivatives on Spot Market Volatility : A Case of Indian Agriculture Commodity

In this research study, an attempt has been made to validate the market perceptions of different bodies on the usefulness and suitability of futures contract in developing the underlying agricultural commodity market in agricultural based Indian economy. The daily price information in spot and futures markets, for a period of 10 years (2004 - 2014), for 7 major agricultural commodities is extracted from NCDEX data base and incorporated into various econometric models, such as ADF Test, GARCH model, Dunkin Watson Statistic etc., to test the concerned objective. The effect of commodity futures trading in stabilizing the underlying agricultural commodity market for 7 major commodities, taken from different categories (Spices, Pulses, Oil and Oil Seeds) of Agri-products, are examined to throw some light on the rising inflation in Indian agricultural sector. Like other studies undertaken in world on Indian commodity market, the present study has also exhibited that even though the inflationary pressure on commodity, especially agricultural commodity, prices have gone up sharply after the introduction of commodity futures contracts, the destabilizing effect of the futures contract is casual in nature and tends to vary over a long period of time. The empirical findings significantly shows that comparative advantage of futures market in disseminating information, leading to a significant price discovery and risk management, can help to successfully develop the underlying commodity market in India.

Wine Futures and Advance Selling Under Quality Uncertainty

This study examines the use of wine futures (i.e., advance selling of wine before it is bottled) as a form of operational flexibility to mitigate quality rating risk. At the end of a harvest season, the winemaker obtains a certain number of barrels of wine that can be produced for a particular vintage. While the wine is aging in the barrel, expert reviewers taste the wine and create a barrel score, indicating the potential quality of the wine and offering clues as to whether, when bottled, it will be superior wine. Based on the barrel score, the wine producer determines (1) the percentage of its wine to be sold as futures and (2) the price of the wine futures. After one more year of aging, the wine is bottled, and the reviewers provide a second review of the wine and assign a bottle score that influences the market price of the wine. Our study makes three contributions. First, we develop an analytical model that incorporates uncertain consumer valuations of wine futures and bottled wine and the uncertain bottle rating that is assigned to the wine at the end of the production process. Our analysis provides insights into how the barrel score, consumer preference (through a conditional-value-at-risk perspective) and the winemaker’s preference influence the winemaker’s allocation and pricing decisions. Our second contribution relates to the impact of consumer heterogeneity on the optimal allocation and pricing decisions. Contrary to common belief that the winemaker may be better off when consumers are more homogeneous, our results demonstrate that the winemaker can achieve a higher level of profitability when the market is filled with consumers that are heterogeneous. Third, we test our findings using data collected from Bordeaux wineries engaging in wine futures. Our empirical analysis demonstrates that (1) barrel scores play a significant role in the two decisions regarding the quantity and price of wine futures, and (2) the wine futures market provides a sizable financial benefit to the winemakers. Our analysis yields recommendations for artisanal and boutique wineries that have limited or no experience selling wine futures.

The Convenience Yield and the Informational Content of the Oil Futures Price

Recent studies have shown that futures prices do not generally outperform naive no-change forecasts of spot prices, calling into question the usefulness of futures prices for forecasting purposes. However, such usefulness is predicated on the question of whether certain modeling strategies are able to yield more of the information found in futures prices. Applying a forecast-based approach, we study the extent to which alternative ways of modeling futures prices can reveal the extent of the information present in futures prices. Using weekly and monthly data, and futures of maturities of one to four months, we notably examine the out-of-sample predictability of futures prices over various forecast horizons, and in real-time, whereby parameters are updated prior to each sequential forecast. Our results with weekly data are particularly interesting. We find that models allowing for a time-varying convenience yield often produce considerably more precise forecasts over the three forecast horizons considered. Thus, more of the informational content of futures prices is attainable when both the price level and the distance of the latter from spot price are jointly considered, rather than when only the price level is considered. We also document that forecast performances improve with longer date-to-maturity futures, suggesting that the role of the convenience yield is greater when physical oil inventories are held for longer durations. Finally, we show that forecast accuracy is highest at the one year horizon, though the time-varying convenience models have a much higher accuracy than unit-root-based models even over the three and five-year horizons.

Opportunities perceived by participants at commodity exchange in the state of Rajasthan

In this investigation an attempt has been made to study the opportunities perceived by farmers, traders and non-traders at bikaner commodity exchange limited, Bikaner Rajasthan. For this purpose primary data were collected for the year 2007- 2008. The required information was collected through personally interviewing the authorized brokers, trading members and farmers associated to the exchange. These data were then analyzed by simple percentage method to obtained objective oriented results. The major opportunities perceived by the traders at Bikaner Commodity Exchange Limited were the futures market are less risky as compared to spot market (92.31), helps traders concentrate on core activity, arbitrage opportunity, price discovery and price risk management, and a good investment option. Taking benefits of prices discovered on platform of commodity exchange (76.32), integrating trade and market support infrastructure, getting benefits indirectly from the use of active futures, using low cost MIS based on various media such as Cell-phone networks, T.V., Radios, Newspapers, and regularly using the market for hedging cash market position at the grass root level were the major opportunities perceived by the farmers at BCEL, Bikaner. Provide long term price signals (89.47), provide facilities for payment and settlement at delivery contract, transparency in prices were the major opportunities perceived by the non-members clients at that exchange.

Influence of farmers’ behavioral attitudes on hedging decisions

Purpose The purpose of this paper is to analyze the factors, including behavior, that impact the knowledge and use of futures contracts among Brazilian coffee producers. The results are based on primary data obtained from a sample of 244 farmers. Design/methodology/approach A multinomial logistic regression model is adjusted to analyze the determinants of the producers’ choices. Findings The results show that behavioral variables play an important role in the decision to use futures contracts: risk propensity, self‐confidence in management, and the level of market monitoring. Variables such as education and crop size also factor into this decision. Research limitations/implications A limitation of this study is that the analysis of farmers’ decisions and behavior was limited to one year. Future research which examines a more comprehensive group of producers over a longer period can reveal in more detail the determining factors for the use of futures contracts as a price risk management tool in the coffee market. Originality/value The paper is the first to interview Brazilian coffee producers about their hedging decisions on a large scale. The main contributions this paper makes to the literature are the inclusion of behavioral variables in its analysis that will prove valuable in both future research and in the investment industry.

Strategic commodity allocation

This article extends the study of the financialization of commodities (Rouwenhorst and Tang [Annu. Rev. Financ. Econ., 2012, 4, 447–467]) by considering an investment in the term structure of commodity futures prices. Specifically, we analyse the benefits of adding a distant commodity futures contract and/or a spot commodity (near month futures contract) to a portfolio of bonds and stocks in a setting similar to Brennan and Schwartz [The use of treasury bill futures in strategic asset allocation programs. In Worldwide Asset and Liability Modeling, edited by W.T. Ziemba and J.M. Mulvey, pp. 205–230, 1998 (Cambridge University Press: Cambridge)]. Our analysis employs an empirical study that covers the post financial crisis period. We show that the spot commodity considerably improves the value of the portfolio. However, an investment in the whole term structure of futures contracts is optimally achieved through high opposite positions in the spot commodity and distant futures contracts. We find that these extreme calendar spreads can result in an inappropriate investment.

Equity ETFs versus Index Futures: A Comparison for Fully Funded Investors

The widespread adoption of exchange traded funds (ETFs) as institutional instruments, tighter trading spreads, and lower fees mean these investment vehicles are increasingly seen by investors as a viable alternative to futures-based exposure. At the same time, the costs of maintaining a given exposure using futures contracts have increased, driven by regulation which has increased capital requirements and which restricts proprietary trading activities. This article 1) summarizes the trade-offs between the use of futures and ETFs for fully funded investors; 2) provides empirical evidence that ETFs are now, in many instances, a lower cost alternative to fully funded futures; and 3) analyses the fundamental drivers of roll mispricing, providing evidence that higher costs for futures reflects longer-run, systematic factors such as regulation that are unlikely to reverse soon. <b>TOPICS:</b>Exchange-traded funds and applications, futures and forward contracts, performance measurement

Utilização de Contratos Futuros do Ibovespa em Carteiras de Fundos de Pensão no Brasil: uma abordagem setorial

Os Fundos de Pensão têm buscado melhores estratégias para gerenciamento de seus ativos. Este trabalho pretende analisar o risco das carteiras de Fundos de Pensão com e sem contratos futuros do Ibovespa e avaliar os ganhos obtidos na relação retorno/risco por uma abordagem setorial proposta. Os níveis de utilização de contratos futuros que permitissem o hedge ótimo foram obtidos a partir dos modelos de cointegração e o risco, representado pelo Valor em Risco (VaR), foi obtido via modelos de volatilidade condicional. Notou-se que o retorno médio diário das estratégias com hedge cai em relação à estratégia sem hedge. Entretanto, essa queda é relativamente pequena diante da queda do risco proporcionada pela utilização de contratos futuros do Ibovespa. Os resultados encontrados indicaram que um gerenciamento dinâmico, a partir de um acompanhamento setorial dos ativos que compõem determinada carteira de investimento, torna o desempenho do portfólio melhor, reduzindo consideravelmente o nível de risco assumido.

Well-structured futures and cache locality

In fork-join parallelism , a sequential program is split into a directed acyclic graph of tasks linked by directed dependency edges, and the tasks are executed, possibly in parallel, in an order consistent with their dependencies. A popular and effective way to extend fork-join parallelism is to allow threads to create {futures . A thread creates a future to hold the results of a computation, which may or may not be executed in parallel. That result is returned when some thread touches that future, blocking if necessary until the result is ready. Recent research has shown that while futures can, of course, enhance parallelism in a structured way, they can have a deleterious effect on cache locality. In the worst case, futures can incur Ω(P T∞ + t T∞) deviations, which implies Ω(C P T∞ + C t T∞) additional cache misses, where C is the number of cache lines, P is the number of processors, t is the number of touches, and T∞ is the computation span . Since cache locality has a large impact on software performance on modern multicores, this result is troubling. In this paper, however, we show that if futures are used in a simple, disciplined way, then the situation is much better: if each future is touched only once, either by the thread that created it, or by a later descendant of the thread that created it, then parallel executions with work stealing can incur at most O(C P T 2 ∞) additional cache misses, a substantial improvement. This structured use of futures is characteristic of many (but not all) parallel applications.