We analyze the effect various delivery options embedded in commodity futures contracts have on the futures price. The two embedded options considered are the timing and location options. We show that early delivery is always optimal when only a timing option is present, but not so with joint options. The estimates of the combined options are much smaller than the comparable estimates for the timing option alone. The average value of the joint option is about 5% of the average basis on the first day of the maturity month. This suggests that joint options can increase deliverable supplies while potentially having only a small effect on basis behavior.
JEL Classifications: G13, Q14
The corn futures contract, traded on the Chicago Board of Trade, provides sellers with delivery options about the timing of delivery, the location of delivery, and the grade to be delivered. These options presumably have values that can vary from one delivery month to the next. The joint values of the timing and location options are estimated for each delivery month for the years 1989 through 1997. These estimates are then used in regression models to determine the degree to which they influence basis variability on the first day of the maturity month. Econometric models are also developed to see if the estimated implicit options values are useful in improving the forecasts of basis convergence over the 2-month period prior to maturity. The results suggested that variation in the delivery options values in the corn futures contract does indeed help explain basis variability on the first day of maturity. An option-value variable, based on estimated values two months prior to maturity, resulted in occasional, small improvements (from a statistical point of view) in the precision of forecasts. The existence of delivery options increases basis variability at maturity, but it is difficult to use this information to improve forecasts of basis convergence. One limitation of the analysis is that the Chicago cash market had few transactions per day during the sample period, and hence the reported spot prices may be inadequate for making high-quality estimates of the options values.
This paper analyzes rent seeking for agricultural import quotas and the associated waste of resources when politically contestable licenses are allocated to either or both importers and exporters. In a two‐stage simultaneous contest where firms seek rent for licenses and then bargain over the import/export price, it is shown that (1) rents are not dissipated completely because of uncertainty in allocation of “rights,” (2) the dissipation ratio increases if the country with a more competitive contest increases the probability of establishing licenses, (3) rent seeking may cause the market structure to change, (4) less rent is dissipated in the case of pre‐existing market power, and (5) allocation of multiple licenses decreases rent‐seeking outlays.
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