Role of delivery options in basis convergence

✍ Scribed by Jana Hranaiova; William G. Tomek

• Publisher: John Wiley and Sons
• Year: 2002
• Tongue: English
• Weight: 158 KB
• Volume: 22
• Category: Article
• ISSN: 0270-7314
• DOI: 10.1002/fut.10028

✦ Synopsis

Abstract

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.
© 2002 Wiley Periodicals, Inc. Jrl Fut Mark 22:783–809, 2002