We examine the markets for one-month LIBOR futures contracts and options on those futures for a year-end price effect consistent with the previously identified year-end rate increase in onemonth LIBOR. The cash market rate increase passes through to derivative prices, which allows the derivatives to properly hedge year-end interest rate risk. However, while the year-end effect appears in the de...

A 24-hour exchange market was created on the Web to trade political futures contracts using fictitious money. In this online market, a political futures contract is a futures contract which matures on the election day with a liquidation price determined by the percentage of votes a candidate receives on the election day. Continuous double auctions were implemented as the system for order storag...

This paper investigated the hedging effectiveness of crude palm oil futures market in Malaysia from January 2009 to June 2011 which traded under Bursa Malaysia Derivatives Berhad. Ordinary Least Squared (OLS) method was used to compute Minimum-Variance hedging ratio (MVHR), R-squared and hedging effectiveness by using daily data from settlement price of crude palm oil futures contracts and spot...

In the absence of market frictions, the cost of carry model of stock index futures pricing predicts that returns on the underlying stock index and the associated stock index futures contract will be perfectly contemporaneously correlated. Evidence suggests, however, that this prediction is violated with clear evidence that the stock index futures market leads the stock market. We argue that tra...

This paper studies the market phenomenon of non-convergence between futures and spot prices in the grains market. We postulate that the positive basis observed at maturity stems from the futures holder’s timing options to exercise the shipping certificate delivery item and subsequently liquidate the physical grain. In our proposed approach, we incorporate stochastic spot price and storage cost,...

We track the trade-by-trade transaction histories of futures traders over a period of 33 months and separately analyze their tendency to offset their positions to realize gains and losses on the Taiwan Futures Exchange (TAIFEX). We demonstrate that there exist great variations among the traders in the disposition effect. Specifically, we demonstrate how a trader's innate characteristics, such a...

This paper considers the multiperiod hedging decision in a framework of mean-reverting spot prices and unbiased futures markets. The task is to determine the optimal hedging path, i.e., the sequence of positions in futures contracts with the objective of minimizing the variance of an uncertain future cash flow. The model is used to illustrate both hedging using a matchedmaturity futures contrac...

Assuming that a futures price is a function of the underlying asset and the basis, and that a Brownian bridge process drives the basis, this article provides the closed-form solution of futures with basis risk (FBR). The Brownian bridge process ensures that the basis is zero at the maturity of a futures contract. The FBR model is empirically tested with daily S&P500 futures data and is found to...

This paper shows pricing and hedging efficiency of a three factor stochastic mean reversion Gaussian model of commodity prices using oil and copper futures and forward contracts. The model is estimated using NYMEX WTI (light sweet crude oil) and LME Copper futures prices and is shown to fit the data well. Furthermore, it shows how to hedge based on a three-factor model and confirms that using t...