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Theory Of Storage
The Theory of Storage describes features observed in commodity markets: When available supplies of the commodity in question are high, and the working inventories of commercial consumers of that commodity are accordingly held to a minimum, * Futures prices tend to be in contango * The volatility of spot and futures prices tend to be low, and futures premiums rise to the full cost of storage When supplies are tight, and purchasing managers build production inventory levels to ensure availability, * Futures prices tend toward backwardation * The volatility of cash and the nearby futures prices rises with respect to that of the more distant futures contracts The theory of storage was originally developed and described by Holbrook Working in 1933.Working, H. 1933, "Price Relations between July and September Wheat Futures at Chicago Since 1885", Wheat Studies of the Food Research Institute. It was extended by Nicholas Kaldor in 1939 (who introduced the notion of convenience yield A c ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Commodity Market
A commodity market is a market that trades in the primary economic sector rather than manufactured products, such as cocoa, fruit and sugar. Hard commodities are mined, such as gold and oil. Futures contracts are the oldest way of investing in commodities. Commodity markets can include physical trading and derivatives trading using spot prices, forwards, futures, and options on futures. Farmers have used a simple form of derivative trading in the commodity market for centuries for price risk management. A financial derivative is a financial instrument whose value is derived from a commodity termed an underlier. Derivatives are either exchange-traded or over-the-counter (OTC). An increasing number of derivatives are traded via clearing houses some with central counterparty clearing, which provide clearing and settlement services on a futures exchange, as well as off-exchange in the OTC market. Derivatives such as futures contracts, Swaps (1970s-), Exchange-traded C ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Contango
Contango is a situation where the futures price (or forward price) of a commodity is higher than the ''expected'' spot price of the contract at maturity. In a contango situation, arbitrageurs or speculators are "willing to pay more owfor a commodity o be receivedat some point in the future than the actual expected price of the commodity t that future point This may be due to people's desire to pay a premium to have the commodity in the future rather than paying the costs of storage and carry costs of buying the commodity today." On the other side of the trade, hedgers (commodity producers and commodity holders) are happy to sell futures contracts and accept the higher-than-expected returns. A contango market is also known as a normal market, or carrying-cost market. The opposite market condition to contango is known as backwardation. "A market is 'in backwardation' when the futures price is below the ''expected'' spot price for a particular commodity. This is favorable for inv ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Backwardation
Normal backwardation, also sometimes called backwardation, is the market condition where the price of a commodity's forward or futures contract is trading below the ''expected'' spot price at contract maturity. The resulting futures or forward curve would ''typically'' be downward sloping (i.e. "inverted"), since contracts for further dates would typically trade at even lower prices. In practice, the expected future spot price is unknown, and the term "backwardation" may refer to "positive basis", which occurs when the current spot price exceeds the price of the future. The opposite market condition to normal backwardation is known as contango. Contango refers to "negative basis" where the future price is trading above the expected spot price. Note: In industry parlance backwardation may refer to the situation that futures prices are below the ''current'' spot price. Backwardation occurs when the difference between the forward price and the spot price is less than the cost of ca ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Holbrook Working
Holbrook Working (February 5, 1895 – October 5, 1985) was an American professor of economics and statistics at Stanford University's Food Research Institute known for his contributions on hedging, on the theory of futures prices, on an early theory of market maker behavior, and on the theory of storage (including the ''Working curve'' which plots the difference between short term and long term grain futures prices against current inventory). Biography He was born in Fort Collins, Colorado, on February 5, 1895. Working earned his Ph.D. in Agricultural Economics from the University of Wisconsin–Madison in 1921. He taught at Cornell University and the University of Minnesota before he joined Stanford's Food Research Institute in 1925. His younger brother Elmer Working made a major contribution on the identification problem for demand curves in econometrics, with which Holbrook Working was also involved. Working disagreed with Keynes's backwardation theory of futures pric ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Nicholas Kaldor
Nicholas Kaldor, Baron Kaldor (12 May 1908 – 30 September 1986), born Káldor Miklós, was a Cambridge economist in the post-war period. He developed the "compensation" criteria called Kaldor–Hicks efficiency for welfare comparisons (1939), derived the cobweb model, and argued for certain regularities observable in economic growth, which are called Kaldor's growth laws. Kaldor worked alongside Gunnar Myrdal to develop the key concept Circular Cumulative Causation, a multicausal approach where the core variables and their linkages are delineated. Both Myrdal and Kaldor examine circular relationships, where the interdependencies between factors are relatively strong, and where variables interlink in the determination of major processes. Gunnar Myrdal got the concept from Knut Wicksell and developed it alongside Nicholas Kaldor when they worked together at the United Nations Economic Commission for Europe. Myrdal concentrated on the social provisioning aspect of development, while ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Convenience Yield
A convenience yield is an implied return on holding inventories. It is an adjustment to the cost of carry in the non- arbitrage pricing formula for forward prices in markets with trading constraints. Let F_ be the forward price of an asset with initial price S_t and maturity T. Suppose that r is the continuously compounded interest rate for one year. Then, the non-arbitrage pricing formula should be F_ = S_t \cdot e^ However, this relationship does not hold in most commodity markets, partly because of the inability of investors and speculators to short the underlying asset, S_t. Instead, there is a correction to the forward pricing formula given by the convenience yield c. Hence F_ = S_t \cdot e^ This makes it possible for backwardation to be observable. Example A trader has observed that the price of six-month (T) gold futures price (F) is $1,300 per troy ounce, whereas the spot price (S) is $1,371 per troy ounce. The (not compounded) borrowing rate for a six-month loa ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
