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The case describes two episodes where the basic valuation model (cost of carry model) for single stock futures appears to break down. The first involves market manipulation and the second involves an unexpected change in the record date for an already announced dividend. This breakdown leads to large losses for the participant in these futures markets.

This paper aims to investigate price responses and volatility spillovers between commodity spot and futures markets. The study ultimately seeks the evidence-based claims on the efficiency of the long run and short run horizontal price transmissions from futures markets to spot markets.

This study used the most recent daily price series of pepper, cardamom and rubber, during the period 2004–2019, use “cointegration-ECM-GARCH framework” and verify the persisting validity of the “expectancy theory” of commodity futures pricing.

The results offer overwhelming evidence of futures market dominance in the price discoveries and volatility spillovers in spot markets. However, this paper finds asymmetric responses between cash and futures prices across markets. The hedging efficiency of futures contracts is commodities specific’ where spices futures are more efficient than the rubber futures.

The study passes on vital information to the producers and traders of spices and rubber who have a potential interest in the use of futures contracts to make profits from arbitrage between futures and cash markets.

The paper is unique in terms of understanding asymmetric price linkages in markets for plantation crops.

While the classic futures pricing tool works well for capital markets that are less affected by sentiment, it needs further modification in China's case as retail investors constitute a large portion of the Chinese stock market participants. Their expectations of the rate of return are prone to emotional swings. This paper, therefore, explores the role of investor sentiment in explaining futures basis changes via the channel of implied discount rates.

Using Chinese equity market data from 2010 to 2019, the authors augment the cost-of-carry model for pricing stock index futures by incorporating the investor sentiment factor. This design allows us to estimate the basis in a better way that reflects the relationship between the underlying index price and its futures price.

The authors find strong evidence that the measure of Chinese investor sentiment drives the abnormal fluctuations in the basis of China's stock index futures. Moreover, this driving force turns out to be much less prominent for large-cap stocks, liquid contracting frequencies, regulatory loosening periods and mature markets, further verifying the sentiment argument for basis mispricing.

This study contributes to the literature by relying on investor sentiment measures to explain the persistent discount anomaly of index futures basis in China. This finding is of great importance for Chinese investors with the intention to implement arbitrage, hedging and speculation strategies.

Traditionally, people values KTB futures contracts using the model based on the cost-of-carry argument. However, the underlying commodity for the KTB futures is non-tradable, and so the cost of carry argument cannot be applied to the KTB futures. This paper regards KTB futures contracts as interest-rate derivatives, and prices them using the Black-Karasinski (B-K) term structure model. This paper documents that (1) the market prices of KTB futures are more close to B-K model price than the price by the cost-of-carry argument, though the KTB futures are generally underpriced in the market even under the B-K model; (2) The extent of underpricing is a decreasing function of the remaining maturity of the futures, and becomes smaller recently; (3) The cost of carry argument relatively overprices the KTB futures, and the degree of overpricing is a decreasing function of interest rates and the remaining maturity of the futures; (4) The daily resettlement in the futures contracts affects the futures price very little; (5) The trading strategies based on the theoretical pricing models produce very high trading profit.

The purpose of this paper is to investigate the recession effects in market efficiency of natural rubber futures contracts traded in India.

The research draws inferences from Granger causality and Engle–Granger cointegration tests, which are administered separately on 14 year daily price data spanning into two distinct, non-overlapping time series of 2004–2008 and 2009–2017.

Analysis shows that rubber futures market is informationally efficient in price discovery. The results of cointegartion tests indicate that a long-term relationship does exist between futures and spot prices of the natural rubber in India. The recession effects in the market efficiency of rubber futures contracts are evident from the increase in optimal hedge ratios estimated with the cointegration methodology.

The study pursues a simple cointegration methodology to assess the causal relations between spot and futures market prices in the Indian context. Future studies investigating the long-run causal relations, with error correction framework, between spot and future prices of rubber from other leading rubber producing countries can validate the findings more on this issue.

The research expects to pass on vital information inputs on the implications of future contracts to rubber traders for managing their portfolios. The study of this kind definitely will be a great help to farmers and exporters who are potentially interested in gaining access to a hedging vehicle.

The paper is unique in terms of understanding the effects of economic recession in information efficiency of futures market. Moreover, a limited number of studies have explored the functional utilities of rubber futures in emerging market context.

The purpose of this paper is to examine the nexus between interest rate changes and commodity spot prices.

The cost‐of‐carry model of simultaneous equilibrium in commodity spot and futures prices is employed to gauge the effects induced by interest rate changes. Results depend crucially on the type of expectations that prevail for the commodity market in question.

Under mean‐reverting expectations, an increase (decrease) in the interest rate will cause the spot price to drop (increase) and commodity suppliers to dishoard (hoard) inventories. Under invariant expectations, the change in the interest rate induces no change in the spot price and no hoarding/dishoarding behavior among commodity suppliers. Under momentum expectations, an increase (decrease) in the interest rate will cause the spot price to increase (drop) and suppliers to hoard (dishoard) inventories.

The effects of monetary policy actions on commodity spot prices can be gauged employing the simple model developed here.

A novel application of the cost‐of‐carry model is presented.

This chapter develops a no-arbitrage, futures equilibrium cost-of-carry model to demonstrate that the existence of cointegration between spot and futures prices in the New York Mercantile Exchange (NYMEX) crude oil market depends crucially on the time-series properties of the underlying model. In marked contrast to previous studies, the futures equilibrium model utilizes information contained in both the quality delivery option and convenience yield as a timing delivery option in the NYMEX contract. Econometric tests of the speculative efficiency hypothesis (also termed the “unbiasedness hypothesis”) are developed and common tests of this hypothesis examined. The empirical results overwhelming support the hypotheses that the NYMEX future price is an unbiased predictor of future spot prices and that no-arbitrage opportunities are available. The results also demonstrate why common tests of the speculative efficiency hypothesis and simple arbitrage models often reject one or both of these hypotheses.

This paper shows the limitation of the cost-of-carry model which is used for pricing the theoretical value of the KTB futures, and proposes an alternative pricing model based on the term structure of interest rates. Under the assumption of 1-factor term structure, this paper treats the theoretical price of KTB futures price as a risk-neutral expectation of payoff function at maturity and derives the approximated formula for pricing the KTB futures. As compared with our price of KTB futures using the term structure of interest rates, the conventional KOFEX price based on the cost-of-carry model tends to be overvalued as the time to maturity increases. This result is due to the difference between the futures and forward prices which is caused by treating the futures contract as the forward contract in the conventional KOFEX pricing model. In particular, this discrepancy becomes more significant when the price of underlying asset and the interest rates are negatively correlated and the time to maturity is longer. The bond futures contract is a typical example of financial instrument whose price has a negative correlation with interest rates

The purpose of this paper is to investigate the validity of the cost of carry model by examining the time series properties of the deviation between future and spot prices in the European Union Emissions Trading Scheme (EU-ETS) over the time period 2005-2012. The paper utilizes a non-linear mean reverting adjustment mechanism, and discovers that although deviations of future from spot prices can exhibit a region of non-stationary behaviour, overall they are stationary indicating market efficiency in the trading of carbon permits.

The methodology involves non-linear mean reverting unit root tests.

The findings provide insights into the functioning of the EU-ETS market. They suggest that it is informationally efficient and does not permit arbitrage between spots and futures.

The authors are the first study to examine efficiency in the EU-ETS by investigating the validity of the cost of carry model. The authors are also the only study to look at efficiency in both Phase I and Phase II of the scheme.

This paper proposes two alternative methods which are used for pricing the theoretical value of the KTB futures on the non-traded underlying asset; first method is to use the CKLS model, under which the volatility of interest rate changes is highly sensitive to the level of the interest rate, and then employ binomial trees to compute the theoretical value of futures, second one is to use the multifactor Vasicek model considering correlations between yields-to-maturity and then employ the Monte Carlo simulation to compute it. In the empirical study on KTB303 and KTB306, an CKLS methodology is superior to the conventional KORFX method based on the cost-of-carry model in terms of the size of difference between market price and theoretical price. However, the phenomena, the price discrepancy using the KOFEX methodology is very small for all test perlod, implies that the KOFEX one is being used for the most market participants. The reasons that an multifactor Vasicek methodlogy is performed poorly in comparison to another methods are 1) the Vasicek model might be not a good model for explaining the level of interest rates, or 2) the important point considered by the most market participants may be on the volatility or interest rate, not on the correlations between yields-to-maturity.