The timing option embedded in a futures contract allows the short position to decide when to deliver the underlying asset during the last month of the contract period. In this paper we derive, within a very general incomplete market framework, an explicit model independent formula for the futures price process in the presence of a timing option. We also provide a characterization of the optimal...

Coffee is both an important source of export revenue for developing countries and the underlying asset for the largest futures markets in soft commodities. This paper examines the interdependence of these spot and futures markets, with particular emphasis on the effect futures trading activity, especially speculative behaviour, has on the price risk in spot markets. We identify change points as...

This paper provides evidence of linkages between the equity market and the index futures market in Australia where the futures market has experienced a major structural event due to the futures contract respecification. An extended bivariate EGARCH model is developed that includes cointegrating residual as an explanatory variable for both the conditional mean and the conditional variance. The c...

Basis = price of hedged asset-price of hedging instrument problem of basis risk: uncertainties of processes describing the evolution of prices of asset and hedging instrument not identical, only highly correlated Example 1: weather derivatives hedged asset: heating oil sales, hedging instrument: HDD derivative HDD derivative: contract paying a premium in case HDD above a critical threshold Exam...

The prices of financial futures contracts can be interpreted as forecasts of the spot rates, which will apply at the final delivery date of that contract. Financial futures contracts have been traded daily since the early 1980s and provide a substantial bank of data to test the forecasting efficiency of such contracts. Tests are carried out to examine whether the interest rates implied by the f...

D erivatives such as futures contracts on Treasury bonds (T-bonds) anci notes are tailorniade for hedging interest-rate risk, and in priticiple, computation of an optimal hedge ratio should be easy. The risk-minimizing number oi contracts is obtained by dividing the price value of a basis point {PVBP) ofthe underlying cash position (i.e., the change in dollar value resulting trom a I basis poin...

This paper examines the convexity bias introduced by pricing interest rate swaps off the Eurocurrency futures curve and the market's adjustment of this bias in prices over time. The convexity bias arises because of the difference between a futures contract and a forward contract on interest rates, since the payoff to the latter is non-linear in interest rates. Using daily data from 1987-1996, t...

This analysis examines a simultaneous estimation option-based approach to forecast futures prices in the presence of daily price limit moves. The procedure explicitly allows for changing implied volatilities by estimating the implied futures price and the implied volatility simultaneously. Using 15 years of futures and futures options data for three agricultural commodities, we find that the si...

Preliminary draft Not for attribution Comments welcome Current drafts of this paper and the associated computer programs and data will be posted to my web site: All errors are my own responsibility. Abstract / Summary The market for US equity indexes has traditionally comprised floor-traded index futures contracts and the individual markets for the component stocks. This picture has been altere...

We develop and empirically test a continuous time equilibrium model for the pricing of oil futures. The model provides a link between no-arbitrage models and expectation oriented models. It highlights the role of inventories for the identification of different pricing regimes. In an empirical study the hedging performance of our model is compared with five other oneand two-factor pricing models...