The effectiveness and usefulness for commodity-dependent countries of new tools in commodity markets: risk management and collateralized finance

This paper describes the experiences of developing country enterprises, farmers and governments with commodity price risk management and various forms of structured finance. It explores the constraints that these entities face in using modern financial markets, including counterparty and sovereign risk obstacles, and problems in their legal and regulatory framework. Various schemes to overcome such obstacles are examined.commodity futures market, futures, options, risk management, structured finance, warehouse receipts, securitization

Futures Exchange Innovations: Reinforcement versus Cannibalism

Futures exchanges are in constant search of futures contracts that will generate a profitable level of trading volume. In this context, it would be interesting to determine what effect the introduction of new futures contracts have on the trading volume of the contracts already listed. The introduction of new futures contracts may lead to a volume increase for those contracts already listed and hence, contribute to the success of a futures exchange. On the other hand, the introduction of new futures contracts could lead to a volume decrease for the contracts already listed, thereby undermining the success of the futures exchange accordingly. Using a multi-product hedging model in which the perspective has been shifted from portfolio to exchange management, we study these effects. Using data from two exchanges that are different regarding market liquidity (Amsterdam Exchanges versus Chicago Board of Trade) we show the usefulness of the proposed tool. Our findings have several important implications for a futures exchange's innovation policy.

Time variation in the tail behaviour of bunds futures returns

The present paper focuses on three questions: (i) Are heavy tails a relevant feature of the distribution of BUND futures returns? (ii) Is the tail behaviour constant over time? (iii) If it is not, can we use the tail index as an indicator for financial market risk and does it add value in addition to classical indicators? The answers to these questions are (i) yes, (ii) no, and (iii) yes. The tail index is on average around 3, implying the nonexistence of the fourth moments. A recently developed test for changes in the tail behaviour indicated several breaks in the degree of heaviness of the return tails. Interestingly, the tails of the return distribution do not move in parallel to realised volatility. This suggests that the tails of futures returns contain information for risk management that complements that gained from more standard statistical measures. JEL Classification: C14, G13extreme value theory, futures returns, risk management, Tail index

Water Scarcity in the Zambezi Basin in the Long-Term Future: A Risk Assessment

The aim of this paper is to explore possible futures for the Zambezi basin and to estimate the risks of different water management strategies. Existing uncertainties are translated into alternative assumptions. The risk of a certain management strategy, which has been developed under a given set of assumptions, is analysed by applying alternative assumptions. For the exploration of possible futures, a dynamic simulation model is used. Three ‘utopias’ and a number of ‘dystopias’ are considered. A utopia is based on a coherent set of assumptions with respect to world-view (how does the world function), management style (how do people respond) and context (exogenous developments). A dystopia evolves if some assumptions are taken differently. Using the risk assessment method described, the paper reflects on the water policy priorities earlier proposed in an expert meeting held in Harare. It is shown that in only one out of the nine cases putting the ‘Harare priorities’ into practice will work out effectively and without large tradeoffs. It is concluded that minimising risks would require a radical shift from supply towards demand policy.\u

LIVESTOCK FUTURES MARKETS AND RATIONAL PRICE FORMATION: EVIDENCE FOR LIVE CATTLE AND LIVE HOGS

The efficiency of livestock futures markets continues to receive attention, particularly with regard to their forward pricing or forecasting ability. The purpose of this paper is to present a more general theory that encompasses the forward pricing concept. It is argued that futures contract prices for competitively produced nonstorable commodities, such as live cattle and live hogs, follow a rational formation process. Futures contract prices reflect expected market conditions when contracts are sufficiently close to the delivery month that the supply of the underlying commodity cannot be changed. However, prior to the period when future supplies are relatively fixed, futures contract prices should adjust to reflect the competitive equilibrium, where output price equals average costs of production. Presented evidence suggests that live cattle and live hog futures markets support the rational price formation hypothesis: prices for distant contracts reflect average costs of feeding. Implications for risk management strategies are considered.Demand and Price Analysis, Livestock Production/Industries,

Leisure studies education: Historical trends and pedagogical futures in the United Kingdom and beyond

This paper is an attempt to stimulate debate about the decline of leisure studies and the rise of courses and subject fields defined by sport, events, tourism management. It is argued that although this decline has happened, there are two possible futures for a re-purposed leisure studies that would ensure its survival

A USER'S GUIDE TO UNDERSTANDING BASIS AND BASIS BEHAVIOR IN MULTIPLE COMPONENT FEDERAL ORDER MILK MARKETS

What are the general ideas behind a futures contract price and the concept of the Basis calculation? The Class 3 milk futures contract traded at the Chicago Mercantile present opportunities for you to forward price your milk if your milk is pooled in a multiple component market such as Federal Order #33. The use of a Class 3 or Class 4 milk contract allows a producer to forward price the butterfat, protein and other solids components of his milk production in multiple-component pricing federal orders or to forward price butterfat and skim in fat/skim federal order markets. Using the futures instruments to protect against uncertain market prices is a new revenue management tool for the dairy industry. Likewise, the use of a Class 3 or Class 4 contract allows a dairy product manufacturer (buyer of liquid milk) to forward price the butterfat, protein and other solids components of his liquid milk needs to protect against rising prices. The use of futures markets to accurately forward price milk either as an output or as an input necessitates that one must know the relative cash price/futures price relationships that are captured in what is called basis. This article will define the general concept of basis as it is used in futures and options markets and how it can be calculated for a milk producer who intends to use Class 3/4 futures contracts as a means to hedge against price declines in a multiple component market. The focus in this paper will be on the Class 3 futures contract and to multiple-component Federal Order markets. The use of the other class contract, the Class 4 futures contract, raises additional issues and will be discussed in a sequel to this paper.Livestock Production/Industries, Marketing,

Grain Futures Markets: What Have They Learned?

Taken together, studies that examine how well commodity futures markets perform find that risk premiums are common—and so unbiasedness is not—and markets are not uniformly efficient across commodities or forecast horizons. This large body of research sheds important light on whether and to what extent commodity-futures markets forecast optimally future spot prices and, so, enable commercials to manage price risk by effectively parsing out much of it to speculators, a process that improves the total welfare of an economy with competitive but otherwise-incomplete markets. Nevertheless, that speculators can, in effect, improve welfare in this way has done little to quell popular hostilities toward futures markets. Such hostilities—and, in particular, those directed at speculators—in North America date to the inception of these markets in the nineteenth century, and have contributed to the unflattering depiction of the early futures exchange as an inchoate and poorly managed institution that initially served only the (illegitimate) aspirations of gamblers, an original-sin creation narrative that surely compromises the legitimacy of modern futures markets. Unfortunately, economists’ understanding of early commodity-futures markets is particularly fragmented—the extant literature focuses almost exclusively on the post-World War II era—and, as such, claims regarding the performance of early futures markets remain largely unsubstantiated in any quantitatively measurable sense. In this paper, I test and compare the efficiency properties of wheat, corn, and oats futures prices on the Chicago Board of Trade (CBT) from 1880 to 1890 and from 1997 to 2007. I demonstrate that, on balance, these nascent nineteenth-century grain-futures markets were, like their contemporary counterparts in this case, mostly efficient. As such, these results support the claims of early proponents of futures markets who argued that the development of the futures exchange was shaped primarily by commercial interests who sought to mitigate price risk.commodities futures markets, unbiasedness, efficiency, Chicago Board of Trade, Agribusiness, Agricultural and Food Policy, Agricultural Finance, Demand and Price Analysis, Farm Management, Financial Economics, Marketing, Research Methods/ Statistical Methods, Risk and Uncertainty,

Does Futures Price Volatility Differ Across Delivery Horizon?

We study the difference in the volatility dynamics of CBOT corn, soybeans, and oats futures prices across different delivery horizons via the smoothed Bayesian estimator of Karali, Dorfman, and Thurman (2010). We show that the futures price volatilities in these markets are affected by the inventories, time to delivery, and the crop progress period. Some of these effects vary across delivery horizons. Further, it is shown that the price volatility is higher before the harvest starts in most of the cases compared to the volatility during the planting period. These results have implications for hedging, options pricing, and the setting of margin requirements.Bayesian econometrics, futures markets, seasonality, theory of storage, volatility, Agribusiness, Agricultural and Food Policy, Agricultural Finance, Consumer/Household Economics, Demand and Price Analysis, Farm Management, Financial Economics, Marketing, Research Methods/ Statistical Methods, Risk and Uncertainty,

FUTURES MARKET DEPTH: REVEALED VS. PERCEIVED PRICE ORDER IMBALANCES

In this paper we study futures market depth by examining the price path due to order imbalances thereby allowing us to directly gain insight in the execution costs due to a lack of market depth We propose a two dimensional market depth measure in which the price path due to order imbalances is described by an S-shape function. The proposed market depth measure is applied to transaction specific futures data from Euronext. Subsequently, we examine CBOT traders' perceptions about the price path due to order imbalances and examine the characteristics that are associated with a particular perception. The proposed market depth measure gives guidelines for improving market depth, and can be used to compare competitive futures contracts. It appears that the actual price path due to order imbalances does not match the perceived price path. Traders have various perceptions about the price path due to order imbalances. Dominant perceptions were, S-shape, linear, exponential or zigzag price paths. The differences in traders' perceptions can be traced back to different traders' characteristics among others type of primary futures contract traded, importance of information sources and trading strategy (herd vs. non-herd behavior). The observed disconnect between perceptions and revealed price path due to order imbalances have great implications for market participants who try to minimize execution costs and for the futures exchange management that tries to increase the market depth.Marketing,