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We investigate intraday data for KOSPI 200 index and KOSPI 200 index futures. Hourly theoretical futures prices are calculated based on cost of carry model. we compare hourly index futures prices with their theoretical prices. Consistent with a large body of previous researches in this area, we find the persistent deviation of futures prices from their theoretical prices. Futures prices are undervalued relative to their theoretical prices. The data indicate that the difference between futures price and its theoretical price exhibits U-shaped pattern over the trading hours. The differences are higher at open and at 15:00 and are lower over intraday trading hours, implying that previous studies using daily closing prices overstate this mispricing.

We also examine the effect of intraday spot return on the behavior of the difference between the hourly futures price and its theoretical price. The finding indicates that the intraday momentum generates U-shaped pattern of this mispricing. This contrasts with Kim and Park (2011)'s finding that the difference also increases as the prior 60 day spot return increases. Our finding invalidates their explanation the activities of arbitrageurs bring monotonic increasing pattern of the magnitude of this mispricing in their daily data.

We propose a new explanation the U shaped patttern of the difference between the futures price and its theoretical price generated by the intraday spot return's moment. We introduce risk-seeking trader in our new explanation. The trader's risk-seeking behavior is based on prospect theory (Kahneman and Tversky (1979)). We argue that the risk-seeking traders cause intraday momentum effect to generate the U-shaped pattern of this mispricing. We add speculator's variables to Kim and Park (2011)'s regression equation and estimate it. The results from the regression analysis lend support to our new explanation as well as theirs, implying that speculators and arbitrageurs are present and active in the spot and futures markets and generate different pattern of the mispricing.

To evaluate various hedge programs designed to minimize the risk of an extreme monthly gas bill subject to a pre‐determined hedge program budget.Design/methodology/approach – Historical data were collected on natural gas spot and futures prices. Also, theoretical options prices were calculated. These data were then applied to derive the risk associated with extreme bills under different hedge strategies.Findings – In every instance, having a price cap hedge program is better for core customers of a utility company than not having a hedge program.Research limitations/implications – The better hedge performance is based on historical data. It may not apply to future scenarios. Also, the theoretical options prices may need refinements.Practical implications – Any utility company should seriously consider a price cap hedge program to protect its core customers. The exact program design will likely change but the basic principles and methods described in this paper are directly applicable.Originality/value – This paper provide/guidelines for a utility company to design its hedge programs for the benefits of core customers. Currently, there is no such guideline available and there is no study evaluating these hedge programs. This paper provides a first attempt.

This paper aims to provide the necessity to activate long-term exchange-traded derivatives (ETD) in Korea. In the era of aging, low interest rates and low economic growth, the investment demand for long-term financial products, and its hedging demand have steadily increased. Unfortunately, long-term ETD do not trade in Korea, and this study presents political suggestions to invigorate long-term ETD based on overseas cases and empirical analysis. Specifically, this study suggests the necessity to activate exchange traded funds (ETFs) options, long-term Korea treasury bond futures and options and long-term Volatility Index of Korea Composite Stock Price Index future and options. The introduction of those long-term ETD not only contributes to providing long-term investment and hedging vehicles but also reduces market inefficiencies in the Korean industry of ETFs, bonds and structured products.

We examine the impact of the unique Japanese stock market microstructure on the pricing of stock index futures contracts. We use intraday transactions data for the Nikkei 225 Futures contracts in Osaka and the corresponding Nikkei 225 Index in Tokyo. Incorporating more realistic transaction-cost estimates and various institutional impediments in Japan, we find that the time-varying liquidity of some component shares of the index in Tokyo represents the most critical impediment to intraday arbitrage and often causes futures prices in Osaka to deviate significantly and persistently from their no-arbitrage boundary, especially for longer-lived contracts.

In this research, we analyze the impact of catastrophe events on risk-neutral densities which can be implied from European option markets. As catastrophe events we consider the destruction of the nuclear power plant at Fukushima and the downgrading of U.S. sovereign debt in 2011. In an event study, we analyze the impact on European blue chip index options traded at EUREX. We find that after a short adaption period, probability mass of especially risk-neutral density functions derived from long-term options is shifted toward the right side. Thus, very good states of the economy become more expensive indicating higher prices for deep out-of-the-money options. This signifies that there has been speculation on a recovery of the German stock market after the shocks.

The purpose of this paper is to examine the risk of inefficiency of China's stock index futures market by investigating the opportunity and profitability of exchange‐traded fund (ETF) arbitrage. The explanation of behavioral risk to market efficiency is examined.

Based on cost‐of‐carry model, some assumptions about market efficiency were examined, and statistical tests were implemented to support the findings.

In China, borrowing and lending interest rates are quite different; dividends are small and paid in an irregular manner; and short sale cannot be used in arbitrage by all investors. It is found that the Chinese index futures market is far from efficient.

With reference to the empirical study, this is believed to be the first application of behavioral study to the study of market efficiency. The analysis of the statistics about Chinese index futures market and the algorithm parameters are very valuable for in‐depth understanding of the emerging markets.

The equity futures market was opened in May 6th, 2008 for the first time in Korea but nonetheless it has rarely been researched since. In this paper, we examine whether the market, combined with the stock market, its underlying market, has been offering any arbitrage opportunities to market participants for the period of May 6th, 2008 to March 11, 2010, focusing on the two futures contracts of Samsung Electronics and Hyundai Motors, the two most actively traded ones. Our findings are as follows. First, there have been arbitrage opportunities for the two futures in either direction. Second, the average time period for an arbitrage opportunity was two seconds so arbitrage transactions were feasible indeed. Third, nevertheless, some arbitrage transactions ended up with a loss because the estimated spot price at maturity to carry out an arbitrage trading turned out to be significantly different from the realized one. The discrepancy in these two prices causes a seemingly very safe arbitrage trading a risky one. This risky feature of an arbitrage trading has never been addressed in depth in a paper or a book before, and is a major contribution of this paper.

We address the problem of valuing electricity generation capacity and the opportunities to invest in power generation assets in the deregulated electric power industry. The spark spread option‐based valuation framework is extended to take into consideration the electricity price spikes. This framework provides a valuable tool for merchant power plant owners to perform hedging and risk management. With jumps in the value process of power generation capacity, we demonstrate how to determine the value of an opportunity to invest in acquiring the generation capacity and the threshold value above which a firm should invest. We illustrate the implications of price spikes on the value of electricity generating capacity and the investment timing decisions on when to invest in such capacity.

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.

The role that speculation in futures markets plays during food price spikes is a subject of lively dispute. This issue is often addressed with empirical analyses. They suffer from data limitations and focus on the short-term impacts. The paper aims to discuss these issues.

The authors develop a theoretical model to explain the behaviour of speculators and producers in futures and cash markets. Compared to the only two theoretical analyses by Vercammen and Doroudian where informational externalities are excluded and by Fishe et al. where production responses are excluded, the authors introduce both informational externalities and lagged production responses.

The authors find that the expanded net long positions of commodity index funds (CIF) are inconsistent with lower stock levels that typically prevail before the price spikes. These positions stimulate production, hence stocks, before the price spikes. Thus they contribute to soften the price volatility.

The simulation results indicate that before imposing new regulations on financial markets, such as position limits on index funds, their beneficial medium-term effect as a hedging instrument for commercial participants should not be omitted or underestimated.

Because the authors develop a second-best theoretical framework, the authors find that CIF are not a systematic cause of medium-term market swings.