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Commodity Futures Contract Viability: A Multidisciplinary Approach

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  • Joost M.E. Pennings

    (University of Illinois at Urbana-Champaign)

  • Raymond M. Leuthold

    (University of Illinois at Urbana-Champaign)

Abstract

We propose a development process of commodity futures contracts in which the decisions and wishes of potential customers are investigated simultaneously with the necessary technical properties that need to be met for trading to take place. Within this framework the relationship between trading volume and hedging effectiveness is examined taking both basis risk and market depth risk into account, and the relationship between owner-manager's characteristics and the probability of using futures is examined, taking latent variables and the heterogeneity of owner-managers into account. The relationships are tested on a set of data gathered in a stratified sample of 440 owner-managers by means of computer-assisted personal interviews and on transaction-specific futures data. Structural equation models and multiple regression models are used to validate the relationships. The hedging effectiveness and the variables that play a role in the owner-manager's use of futures are related to the tools of the exchange.

Suggested Citation

  • Joost M.E. Pennings & Raymond M. Leuthold, 1999. "Commodity Futures Contract Viability: A Multidisciplinary Approach," Finance 9905002, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpfi:9905002
    Note: Type of Document - PDF; prepared on IBM PC ; pages: 40 ; figures: included. Office for Futures and Options Research (OFOR) at the University of Illinois at Urbana-Champaign. Working Paper 99-02. For a complete list of OFOR working papers see http://w3.ag.uiuc.edu/ACE/ofor
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    References listed on IDEAS

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    2. Parcell, Joseph L., 2002. "Emerging Ip Markets: The Tokyo Grain Exchange Non-Gmo Soybean Contract," Working Papers 26038, University of Missouri Columbia, Department of Agricultural Economics.
    3. Kennya B. Siqueira & Carlos Arthur B. da Silva & Danilo R.D. Aguiar, 2008. "Viability of introducing milk futures contracts in Brazil: a multiple criteria decision analysis," Agribusiness, John Wiley & Sons, Ltd., vol. 24(4), pages 491-509.

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