Metodología RAD

A forward contract is a bilateral agreement where one party is going to buy an asset at a today predefined time in the future for a fixed price. Hereby someone can be long or short the contract depending on the fact whether he took the asset buyer or seller position. Forwards were originally developed to hedge commodity price risk and are useful vehicles to look at future prices. As described in Section 2.2 commodity producers need to ensure future cash flows to be cost covering. First applications of forwards go back in the 18th and 19th centuries. Potato growers in the state of Maine (USA) started selling their crops at the time of planting in order to finance the production process. Such arrangements became particularly important

41_{For the feature of spot prices in commodity markets see the discussion in Section 5.1.1.}

42_{William Sharpe was rewarded for the Capital Asset Pricing Model, beta and relative risks, Harry} Markowitz for his theory of efficient portfolio selection and Merton Miller for his work on the effect of a firm’s capital structure and dividend policy on market price.

43_{Data source: Futures Industry Magazine Mar/Apr 2006, numbers include financial derivatives} (i.e. derivatives on interest rates or equities)

in industries where non influenceable external factors like weather conditions are of high importance and the production process is cost intensive.

The first established emporiums where in terms of quantity, quality and delivery date standardized forward contracts, so-called future contracts, were traded, are the New York Cotton Exchange (NYCE), founded 1842, and the Chicago Board of Trade (CBOT), founded 1848.

Although forwards and futures on the same underlying with the same time to expiry have the same original spirit ”sell an asset today but deliver it tomorrow” they are different in many counts, including transaction costs, credit risk,44 customization and stochastic interest rate. The most noticeable difference between futures and forwards is that futures are marked-to-market daily and their participants have to adjust their positions on the so-called margin account which introduces an addi- tional re-investment risk: while the profit or loss of a forward contract occurs at the maturity date, the profits and losses of futures contracts are spread over the live of the contract and occur on a daily basis. For instance, if a participant has a long position in a futures contract which price went down from one day to the next, then he gets the so-called margin call from the clearing house standing behind the respec- tive exchange what requests him to cash settle the difference on the so-called margin account. From this point of view a future is a series of daily settled forwards and its value over the whole period is the net present value (NPV) of the single margin calls. If interest rates are not stochastic the NPV equals the NPV of a forward over the whole period.45 _{If interest rates are stochastic the futures price is greater or less}

than the forward price depending on the correlation of interest rates and the com- modity spot price. If they are positively correlated (what in theory should be the case because commodities are real assets) daily payments from price increases will on average be more heavily discounted than payments from price decreases, so the initial futures price must exceed the forward price.46 However, studies have shown, that the difference is typically small. [Pindyck 1994] compared one-month heat- ing oil contracts and estimated the difference being less than 0.01%. [French 1983] compared the futures prices of three month silver and copper contracts with their equivalent forward prices and found that the difference is about 0.1%. Therefore, it is common not to differentiate between forward and futures prices. We will do so, too.

44_{Because forward contracts are over the counter (OTC) bilateral agreements they embody coun-} terparty default risks.

45_{For the formal mathematical proof that forward and futures prices are equal under the assump-} tion of deterministic interest rates see [Zagst 2002].

Historically, the expiration months of futures contracts were without some excep- tions March, June, September and December reflecting the seasonality in commodi- ties markets. This has changed with growing markets. Today there are contracts for every delivery month and long term maturities until 5 years available.

As we mentioned introductory, futures trading has grown rapidly. For instance, the New York Mercantile Exchange (NYMEX) Crude Oil Future is meanwhile listed under the 20th most often traded future contracts worldwide with a trading volume of over 50 million contracts in 2005. This was an increase of around 15%. Its main competitor Brent crude oil futures contract, follows with clear distance. Although its trading volume went up 17% in 2005 it only could reach a volume of 25 million traded contracts. Over this electronic trading is coming up what will additionally boost trading volume in the next years.47

The metals markets showed the same picture. The trading of gold at the NYMEX went up over 6% in 2005 to approximately 13 million traded contracts. The London Metal Exchange (LME) surpassed Shanghai with the most copper futures traded worldwide, with volume up approximately 4% to over 16 million.

The agricultural trading has grown as well. Surprisingly, putting future and option contracts in volume together it has the highest trading volume of all commodity groups. Although the Asian trading volume went down in 2005 the US exchanges registered strong increases: the Chicago Board of Trade (CBOT) corn future went up 14% to over 23 million traded contracts, the CBOT wheat future went up 25% to over 8 million traded contracts and the New York Board of Trade sugar #1 future went up 20% to over 12 million traded contracts.