Dispute Resolution in Commodities Futures

The commodities futures industry is experiencing rapid growth and a consequential rise in disputes between industry professionals and customers. In response to the growing number of disputes, the industry offers customers several methods for resolution, including the recently added National Futures Association (NFA). The NFA fills a gap in previously available forums, as it offers a much needed uniform and nationwide system of arbitration with jurisdiction over multi-exchange disputes. This Note suggests that requiring the exchanges to refer disputes to NFA and to include NFA as the forum for arbitration in pre-dispute arbitration agreements would greatly enhance the effectiveness of this new arbitration forum

The Fundamentals of Commodity Futures Returns

Commodity futures risk premiums vary across commodities and over time depending on the level of physical inventories, as predicted by the Theory of Storage. Using a comprehensive dataset on 31 commodity futures and physical inventories between 1969 and 2006, we show that the convenience yield is a decreasing, non-linear relationship of inventories. Price measures, such as the futures basis, prior futures returns, and spot returns reflect the state of inventories and are informative about commodity futures risk premiums. The excess returns to Spot and Futures Momentum and Backwardation strategies stem in part from the selection of commodities when inventories are low. Positions of futures markets participants are correlated with prices and inventory signals, but we reject the Keynesian "hedging pressure" hypothesis that these positions are an important determinant of risk premiums.

The Theory of Storage and Price Dynamics of Agricultural Commodity Futures: the Case of Corn and Wheat

Using a restricted version of the BEKK model it is tested an implication of the theory of storage that supply-and-demand fundamentals affect the price dynamics of agricultural commodities. The commodities under analysis are corn and wheat. An interest-storage-adjusted-spread was used as a proxy variable for supply-and-demand fundamentals to test the aforementioned implication for both commodities. It is also tested the Samuelson hypothesis that spot prices have higher volatility than futures prices. It is found that the interest-storage-adjusted-spread has had a statistically significant positive influence on the spot and futures returns for both commodities. Likewise, the results also show that spot price returns have higher volatility compared to futures price returns which is consistent with the Samuelson hypothesis. The results of the aforementioned tests are consistent with both theories and with the existing literature related to commodity futures.Agricultural commodities, BEKK model, multivariate GARCH, Samuelson hypothesis, theory of storage

Whether commodity futures market in agriculture is efficient in price discovery? - An econometric analysis

In any agriculture-dominated economy, like India, farmers face not only yield risk but price risk as well. Commodity futures and derivatives have a crucial role to play in the price risk management process, especially in agriculture. The present study is an investigation into the futures markets in agricultural commodities in India. The statistical analysis of data on price discovery in a sample of four agricultural commodities traded in futures exchanges have indicated that price discovery does not occur in agricultural commodity futures market. The econometric analysis of the relationship between price return, volume, market depth and volatility has shown that the market volume and depth are not significantly influenced by the return and volatility of futures as well as spot markets. The Bartlett’s test statistic has been found insignificant in both the exchanges, signifying that the futures and spot markets are not integrated. The exchange-specific problems like thin volume and low market depth, infrequent trading, lack of effective participation of trading members, non-awareness of futures market among farmers, no well-developed spot market in the vicinity of futures market, poor physical delivery, absence of a well-developed grading and standardization system and market imperfections have been found as the major deficiencies retarding the growth of futures market. The future of futures market in respect of agricultural commodities in India, calls for a more focused and pragmatic approach from the government. The Forward Markets Commission and SEBI have a greater role in addressing all the institutional and policy level constraints so as to make the agricultural commodity futures and derivatives a meaningful, purposeful and vibrant segment for price risk management in the Indian agriculture.Agricultural Finance,

On the spot-futures no-arbitrage relations in commodity markets

In commodity markets the convergence of futures towards spot prices, at the expiration of the contract, is usually justified by no-arbitrage arguments. In this article, we propose an alternative approach that relies on the expected profit maximization problem of an agent, producing and storing a commodity while trading in the associated futures contracts. In this framework, the relation between the spot and the futures prices holds through the well-posedness of the maximization problem. We show that the futures price can still be seen as the risk-neutral expectation of the spot price at maturity and we propose an explicit formula for the forward volatility. Moreover, we provide an heuristic analysis of the optimal solution for the production/storage/trading problem, in a Markovian setting. This approach is particularly interesting in the case of energy commodities, like electricity: this framework indeed remains suitable for commodities characterized by storability constraints, when standard no-arbitrage arguments cannot be safely applied

A test of the efficiency of futures markets in commodities

The role of the futures markets in stabilising spot prices has been widely discussed. However, the success of these markets in performing the stabilising function critically depends on whether they are efficient (Fama 181, page 383) in the sense that the futures prices fully reflect the available information. The question of futures market efficiency has assumed greater relevance in view of the recent UNCTAD proposals to stabilise the prices of primary commodities exported mainly by the developing countries. The Integrated Programme for Commodities put forward by the Group of 77 at UNCTAD IV in 1976 calls for the establishment of buffer stocks for 18 such commodities. The recent developments show, however, that the political as well as the economic success of the UNCTAD schemes is rather doubtful. Under these circumstances, the feasibility of other efficient market oriented alternatives for stabilising commodity prices needs to be examined. Further, it could be argued that theoretically the case for buffer stocks for stabilising prices rests in part on the lack of sufficient and rational speculators in these markets. For, if futures markets reflect the available information and provide efficient forecasts of the future spot prices, the rationale for UNCTAD schemes is somewhat weakened. In this paper, we test the efficiency of futures markets for five of the commodities in the UNCTAD list. At the outset, we discuss various approaches for testing the efficiency of futures markets. A semi-strong' test is then performed. The data, the models and the results are presented in sections III through V. The concluding comments and the economic implications are discussed in the last section.

The Present Value Model of Rational Commodity Pricing

The present value model relates an asset's price to the sum of its discounted expected future payoffs. I explore the limits of the model by testing its ability to explain the pricing of storable commodities. For commodities the payoff stream is the convenience yield that accrues from holding inventories, and it can be measured directly from spot and futures prices. Hence the model imposes restrictions on the joint dynamics of spot and futures prices, which I test for four commodities. I find close conformance to the model for heating oil, but not for copper or lumber, and especially not for gold. The pattern is the same for the serial dependence of excess returns, These results suggest that for three of the four commodities, prices at least temporarily deviate from fundamentals.

Macroeconomics, finance, commodities: Interactions with carbon markets in a data-rich model.

This article assesses the transmission of international shocks to EUA spot, EUA futures, and CER futures carbon prices using a broad dataset that includes 115 macroeconomic, financial and commodities indicators with daily frequency from April 4, 2008 to January 25, 2010 totalling 463 observations. The framework adopted is a Factor-Augmented Vector Autoregression model with latent factors extracted from the dataset, as proposed by Bernanke et al. (2005). The main results can be summarized as follows. First, based on impulse responses, we show that carbon prices tend to respond negatively (between − 0.2 and − 1.2 standard deviation) to an exogenous shock that reduces global economic indicators by one standard deviation. Second, we find evidence that the responses are heterogeneous among the different kinds of carbon prices: CER futures prices tend to react much more significantly than EUA spot and futures prices. Third, the factors explain about 50% of the total variance of all variables in the dataset. The largest contribution is accounted for by the factor correlated with commodities markets, which explains about 28% of the total variability.Macroeconomics; Carbon price; FAVAR; Factor models; Commodities; Finance;