Cash Settlement and Price Discovery in Futures Markets

Chan, Leo H.; Lien, Donald

doi:10.2139/ssrn.280409

Cited by 7 publications

(7 citation statements)

References 1 publication

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“…"The largest single market contract category is the 'hog or pork market formula' , meaning that the transaction price in the contract is tied to the spot market for hogs or wholesale pork" (Lawrence 2010). This is in conformity with the statements of Chan and Lien (2001), indicating that the futures market is leading the cash market. The importance of the futures market for lean hogs at the CME is also acknowledged by the open interest, which was 97 333 in November 2010 (contract size: 40 000 pounds or approximately 18 tons).…”

Section: U Samerican and European Hog Marketssupporting

confidence: 89%

Arbitrage hedging in markets for the US lean hogs and the EU live pigs

Ziegelback¹,

Kastner²

2013

AGR ECON-CZECH

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Th e paper describes an attempt to gain insight into the relationship between cash and futures markets for US lean hogs and EU live pigs, and the opportunity of arbitrage hedging. In doing so, the authors use newer methods of threshold cointegration analysis for time series from 1999 until 2008. Besides the existence of a long-run equilibrium, asymmetric price adjustments can be demonstrated. Th is is especially the case for the EU live pigs, where price variations of the basis are higher and exhibit lower standard deviation. Th e results also perfectly show that cash prices follow the futures market more than the other way round. Furthermore, a grid search has revealed that the residual-based threshold in either market is near zero and therefore coherent with economic interpretation. Th us, at least theoretically, arbitrageurs in those markets are able to exploit the price diff erences between the two markets and reap no-risk monetary benefi t. Hence, the results are in line with the statement that "speculating the basis" generates a better return.

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Section: U Samerican and European Hog Marketssupporting

confidence: 89%

Arbitrage hedging in markets for the US lean hogs and the EU live pigs

Ziegelback¹,

Kastner²

2013

AGR ECON-CZECH

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“…Studies such as Wahab and Lashgari (1993), Chan and Lien (2001), Kumar and Chaturvedula (2007), Kumar and Tse (2009), Sriram and Senthil (2013), Zakaria (2012), Sehgal et al (2015), Boney et al (2018) have found the Spot Market playing a dominant role in the Price-Discovery process. In India, (Thenmozhi, 2002) and (Raju and Karande, 2003) analyzed the Lead-Lag and Price-Discovery of Equity Futures Market in India.…”

Section: Chanmentioning

confidence: 99%

The Lead Lag Relationship Between Spot and Futures Markets in the Energy Sector: Empirical Evidence From Indian Markets

Raju

Shirodkar

2020

IJEEP

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The study aims at finding the intraday Lead-Lag relationship between Spot and Futures Market for Energy Sectors Stocks on which Single Stock Futures (SSFs) is available, by applying 1-min Price Returns for the period ranging from April 1, 2017 to March 31, 2019. The study explores pricediscovery between stock futures and their underlying stocks by applying vector error correction model, Hasbrouck (1995) Information Shares, and Common Factor Component Weights of Gonzalo and Granger (1995). The findings indicate that trades in the Futures Market contribute more to Price-Discovery than Spot Market.

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“…Many studies have examine the effect of cash settlement versus physical delivery but their study only focus on specific futures contract and limited to a particular area, Rich and Leuthold (1993) observe the small improvement in basis variability after cash settlement and the conversion bring the improvement in contract performance also for the some hedger but not for all (Chan and Lien, 2002) study the feeder cattle futures contract, and found that the cash settlement changed the structural relationship between cans and futures prices (Lien and Tse, 2002) study the feeder cattle futures and finds that the volatility of future price of feeder cattle declined after conversion the method to cash settlement, Chan and Lien (2001) consider the feeder cattle and lean hog futures and finds that after convergence spot and futures markets become more segmented and futures market was less effective in price discovery (Kenyon et al, 1991). Investigate the basis of individual lots of feeder cattle and found that no basis variability was reduced and hedger ability had not improved significantly after conversion the settlement method to cash settlement.…”

Section: Gap Analysismentioning

confidence: 99%

Exploring the Effect of Physical Delivery V/S Cash Settled Futures Contracts with the Prospective of Obligatory Delivery in Islamic Contract of Sales

Adil

Siddiqui

2019

International Journal of Social and Administrative Sciences

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This study emphasizes that either physical delivery or cash settlement method for futures contract is better for precious metal such as gold and the storable commodities like rice, wheat, sugar, as well as check the effect of both settlement method on the volatility of futures and spot price. To examine the issue we use bivariate GARCH model to discover the interaction between the spot price return and futures price return. The result shows basis variability of spot price and futures prices returns was substantially reduced in the case of physical delivery as compare to the cash settlement of same commodities, which means the physical delivery is more reliable for the rice, wheat, sugar, and gold futures contracts. In addition, physical delivery settlement method is better than the cash settlement because it covers the gap of demand and supply in the market which effect on price and the physical delivery method is more reliable, as it restricts the liquidation of futures contact which declines the price and provide the social benefit as well.Contribution/ Originality: This study contributes to the existing literature of settlement method of futures contracts effects on the spot and futures prices.

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Cash Settlement and Price Discovery in Futures Markets

Cited by 7 publications

References 1 publication

Arbitrage hedging in markets for the US lean hogs and the EU live pigs

Arbitrage hedging in markets for the US lean hogs and the EU live pigs

The Lead Lag Relationship Between Spot and Futures Markets in the Energy Sector: Empirical Evidence From Indian Markets

Exploring the Effect of Physical Delivery V/S Cash Settled Futures Contracts with the Prospective of Obligatory Delivery in Islamic Contract of Sales

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