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Pricing of Forward and Futures Contracts

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  • Ying‐Foon Chow
  • Michael McAleer
  • John Sequeira

Abstract

There has long been substantial interest in understanding the relative pricing of forward and futures contracts. This has led to the development of two standard theories of forward and futures pricing, namely, the Cost‐of‐Carry and the Risk Premium (or Unbiased Expectations) hypotheses. These studies have modelled the relationship between spot and forward/futures prices either through a no‐arbitrage condition or a general equilibrium setting. Relatively few studies in this area have considered the impact of stochastic trends in the data. With the emergence of non‐stationarity and cointegration in recent years, more sophisticated models of futures/forward prices have been specified. This paper surveys the significant contributions made to the literature on the pricing of forward/futures contracts, and examines recent empirical studies pertaining to the estimation and testing of univariate and systems models of futures pricing.

Suggested Citation

  • Ying‐Foon Chow & Michael McAleer & John Sequeira, 2000. "Pricing of Forward and Futures Contracts," Journal of Economic Surveys, Wiley Blackwell, vol. 14(2), pages 215-253, April.
    • Handle: RePEc:bla:jecsur:v:14:y:2000:i:2:p:215-253
    DOI: 10.1111/1467-6419.00110
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    Cited by:

    1. Chang, Chia-Lin & McAleer, Michael & Tansuchat, Roengchai, 2011. "Crude oil hedging strategies using dynamic multivariate GARCH," Energy Economics, Elsevier, vol. 33(5), pages 912-923, September.
    2. Dolatabadi, Sepideh & Nielsen, Morten Ørregaard & Xu, Ke, 2016. "A fractionally cointegrated VAR model with deterministic trends and application to commodity futures markets," Journal of Empirical Finance, Elsevier, vol. 38(PB), pages 623-639.
    3. Sung Je Byun, 2017. "Speculation in Commodity Futures Markets, Inventories and the Price of Crude Oil," The Energy Journal, International Association for Energy Economics, vol. 0(Number 5).
    4. Scott, Ayesha & Schoen, Tilman & Fernandez-Perez, Adrian, 2020. "The Predictive Power of NZX Dairy Futures," 2020 Conference (64th), February 12-14, 2020, Perth, Western Australia 305230, Australian Agricultural and Resource Economics Society.
    5. Eduardo Rossi & Paolo Santucci de Magistris, 2013. "A No‐Arbitrage Fractional Cointegration Model for Futures and Spot Daily Ranges," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 33(1), pages 77-102, January.
    6. Chris D'Souza, 2002. "How Do Canadian Banks That Deal in Foreign Exchange Hedge Their Exposure to Risk?," Staff Working Papers 02-34, Bank of Canada.
    7. Bredin, Don & Potì, Valerio & Salvador, Enrique, 2023. "Revisiting the Silver Crisis," Journal of Commodity Markets, Elsevier, vol. 30(C).
    8. Philippe Raimbourg & Paul Zimmermann, 2022. "Is normal backwardation normal? Valuing financial futures with a local index-rate covariance," Post-Print hal-04011013, HAL.
    9. Clinton Watkins & Michael McAleer, 2003. "Pricing of Non-ferrous Metals Futures on the London Metal Exchange," CIRJE F-Series CIRJE-F-213, CIRJE, Faculty of Economics, University of Tokyo.
    10. Hesamzadeh, M.R. & Biggar, D.R. & Bunn, D.W. & Moiseeva, E., 2020. "The impact of generator market power on the electricity hedge market," Energy Economics, Elsevier, vol. 86(C).
    11. Fernandez, Viviana, 2020. "The predictive power of convenience yields," Resources Policy, Elsevier, vol. 65(C).
    12. Raimbourg, Philippe & Zimmermann, Paul, 2022. "Is normal backwardation normal? Valuing financial futures with a local index-rate covariance," European Journal of Operational Research, Elsevier, vol. 298(1), pages 351-367.
    13. Adam-Müller, Axel F.A. & Nolte, Ingmar, 2011. "Cross hedging under multiplicative basis risk," Journal of Banking & Finance, Elsevier, vol. 35(11), pages 2956-2964, November.
    14. Eduardo Rossi & Paolo Santucci de Magistris, 2009. "A No Arbitrage Fractional Cointegration Analysis Of The Range Based Volatility," CREATES Research Papers 2009-31, Department of Economics and Business Economics, Aarhus University.
    15. Jan Vlachý, 2016. "Valuation of Contractual Assets Using Statistical Simulation," Contemporary Economics, University of Economics and Human Sciences in Warsaw., vol. 10(2), June.
    16. Edyta Marcinkiewicz, 2016. "Short Sale and Index Futures Mispricing: Evidence from the Warsaw Stock Exchange," Prague Economic Papers, Prague University of Economics and Business, vol. 2016(5), pages 547-559.
    17. Huang, Bwo-Nung & Yang, C.W. & Hwang, M.J., 2009. "The dynamics of a nonlinear relationship between crude oil spot and futures prices: A multivariate threshold regression approach," Energy Economics, Elsevier, vol. 31(1), pages 91-98, January.
    18. Watkins, Clinton & McAleer, Michael, 2002. "Cointegration analysis of metals futures," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 59(1), pages 207-221.

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