2016/10/28 by Kevin Guo, Guo, Kevin, Tim Leung +1
Economics, Econometrics and Finance · #60G40 #62L15 #91G20 #91G80 #Capital Investment and Risk Analysis #FOS: Economics and business #Financial Markets and Investment Strategies #Pricing of Securities (q-fin.PR) #Stochastic processes and financial applications #Trading and Market Microstructure (q-fin.TR)
paper · pdf · doi:10.48550/arxiv.1610.09403
openalex publication_date 2016/10/28 · openalex created_date 2019/06/27 · openalex updated_date 2026/07/28
This paper studies the market phenomenon of non-convergence between futures and spot prices in the grains market. We postulate that the positive basis observed at maturity stems from the futures holder's timing options to exercise the shipping certificate delivery item and subsequently liquidate the physical grain. In our proposed approach, we incorporate stochastic spot price and storage cost, and solve an optimal double stopping problem to give the optimal strategies to exercise and liquidate the grain. Our new models for stochastic storage rates lead to explicit no-arbitrage prices for the shipping certificate and associated futures contract. We calibrate our models to empirical futures data during the periods of observed non-convergence, and illustrate the premium generated by the shipping certificate.