Author: Lisa Carol CurrinPublisher:
ISBN:
Category : Cattle
Languages : en
Pages : 134
Book Description
Basis Variability in the Feeder Cattle Contract Before and After Cash Settlement
Author: Lisa Carol CurrinPublisher:
ISBN:
Category : Cattle
Languages : en
Pages : 134
Book Description
Feeder Cattle Cash Settlement
Author: Donald Raymond RichImpact of Cash Settlement and Market Fundamentals on Feeder Cattle Basis
Author: Tanner M. AherinPublisher:
ISBN:
Category :
Languages : en
Pages :
Book Description
With volatile cattle markets, comes substantial amounts of price risk for all parties involved in the industry. Hedging with futures markets to mitigate risk is a common practice performed by commercial producers. For this to be an effective risk management tool, the futures contract must function correctly by accurately representing the price and quality of the underlying product. Often times, commodity futures contracts are settled by physical delivery. However, two livestock contracts transitioned to a cash settled index, feeder cattle in 1986 and lean hogs in 1997, to enhance the performance of the contract and promote participation by commercial users. Eliminating high delivery costs, reducing any issues with the grading process when the product is delivered, and portraying a truer commercial value, are some of the benefits of a cash settlement index. There has been some speculation that dates back to the 1980's regarding whether the live cattle futures contract should switch to cash settlement rather than physical delivery. This study was done to measure the impact the change to cash settlement had on the hedging ability of the feeder cattle futures contract. Even though the feeder cattle contract represents a different sector of the industry, the results still provide some insight as to whether cash settlement can be advantageous for a futures contract. The ability to forecast basis is critical when hedging with futures to manage risk. The magnitude of basis prediction error (BPE), or the difference between expected basis and actual basis, is a common method used to measure the hedging ability of a futures contract. This procedure was utilized to analyze the effects the change to cash settlement had on BPE in six different regions: Kansas, Missouri, Nebraska, North/South Dakota, Oklahoma, and Texas. Expected basis was calculated using a two, three, and four year historical average technique for each respective week to contract expiration. Other market factors were also included in the models to ensure the cash settlement adjustment was not the sole reason for BPE variations over time. To estimate the impact the different elements have on basis predictability, Ordinary Least Squares regression was used for each of the three stacked models. For the two-year historical basis prediction error model, Kansas was the only area with a statistically significant value indicating cash settlement reduced BPE by $0.18. Three states, Kansas (-$0.24/cwt.), Missouri (-$0.17/cwt.), and Texas (-$0.16/cwt.), showed a statistically significant decrease in BPE due to cash settlement for the three-year historical basis prediction error model. Also, the coefficient for Oklahoma was just slightly above the statistically significant level. However, the four-year model had moderately different results. The estimate for Kansas was statistically significant at -$0.18/cwt. meaning cash settlement reduced BPE, while the Dakotas region actually showed a statistically significant increase in BPE by $0.18/cwt. This research provides evidence that cash settlement can improve the basis predictability of a futures contract depending on the region and technique used to calculate expected basis.
Measuring the Impacts of Cash Settlement
Author: Leo H. ChanPublisher:
ISBN:
Category :
Languages : en
Pages : 25
Book Description
Prior to 1986, any opening position on feeder cattle futures contract must be settled with physical delivery after the last trading day. Due to dwindling commercial interests, Chicago Mercantile Exchange (CME) subsequently replaced the system with the cash settlement method. It was argued that cash settlement would help improve the convergence between cash and futures prices and reduce the basis variability. In this paper, we adopted stochastic volatility models to investigate this conjecture. The models allow for time varying volatility. We found strong evidence of reduction in basis and in basis variance after cash settlement. Moreover, cash settlement induced a change in the structural relationship between cash and futures prices. The futures market has become more efficient after the change in settlement methods.
Basis Behavior and Hedging Risk Under Cash Versus Physical Delivery Settlement of the Feeder Cattle Futures Contract for Selected Texas Markets
Author: Petrina Lea DiamondPublisher:
ISBN:
Category : Cattle trade
Languages : en
Pages : 336
Book Description
Cash Settlement of Feeder Cattle Futures Contracts
Author: A.L. HutsonCFTC Report
Author: Rbe
Author: Western Journal of Agricultural Economics
Author: Review of Research in Futures Markets
Author: Publisher:
ISBN:
Category : Commodity exchanges
Languages : en
Pages : 518
Book Description
Consists of the proceedings of seminars on futures markets held by the Chicago Board of Trade.