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Role of delivery options in basis convergence
Author(s) -
Hranaiova Jana,
Tomek William G.
Publication year - 2002
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/fut.10028
Subject(s) - futures contract , econometrics , maturity (psychological) , basis point , convergence (economics) , quality (philosophy) , sample (material) , cash , economics , actuarial science , statistics , financial economics , mathematics , finance , bond , psychology , developmental psychology , philosophy , chemistry , epistemology , chromatography , economic growth
The corn futures contract, traded on the Chicago Board of Trade, provides sellers with delivery options aboutthe timing of delivery, the location of delivery, and the grade to be delivered. These options presumably havevalues that can vary from one delivery month to the next. The joint values of the timing and location optionsare estimated for each delivery month for the years 1989 through 1997. These estimates are then used inregression models to determine the degree to which they influence basis variability on the first day of thematurity month. Econometric models are also developed to see if the estimated implicit options values are usefulin improving the forecasts of basis convergence over the 2‐month period prior to maturity. The resultssuggested that variation in the delivery options values in the corn futures contract does indeed help explainbasis variability on the first day of maturity. An option‐value variable, based on estimated values twomonths prior to maturity, resulted in occasional, small improvements (from a statistical point ofview) in the precision of forecasts. The existence of delivery options increases basis variability atmaturity, but it is difficult to use this information to improve forecasts of basis convergence. One limitationof the analysis is that the Chicago cash market had few transactions per day during the sample period, and hencethe reported spot prices may be inadequate for making high‐quality estimates of the options values.© 2002 Wiley Periodicals, Inc. Jrl Fut Mark 22:783–809, 2002