Inter temporal commodity pricing storage
Future contracts are written on weighted index. Settlement takes place at The value of the index in the delivery month. If you long you must reverse the position by the last trading day. It’s also reversed at the price equal to value of the spot on that day. If you fail to liquidate the clearinghouse will close for you at the prevailing spot of the S&P trading day. It is 250 times the price of the index. So if you open a contract at 1000 and it moves 40 2 months later, that has a price movement of $10,000. If you long you would be up 10,000 versus shorting would be -$10,000
The NASDAQ 100 can be more volatile. So if you have an upward price movement of 100 so the contract is 100 times the price. So I could move up $10,000 in two months.
Inter-Temporal commodity prices
Soy price $5.05 per bushel and $3.87 for a wheat futures. See attached photo. Cash price is same as spot price. You need to specify the delivery location for the cash price which is specified in the contract. Most future contracts settle in Chicago but some may be delivered for Stockton. There’s a difference between cash and futures which is the basis. Basis is the difference between the futures and the cash price. In the attached photo you’ll see Soy bean futures price rise because of storage fees. If you hold the soybean commodity between November and March, the storage of it will cost money. So you can use inter temporal pricing into the future against today’s spot price and add the cost of storage.
If you’re March future went to 570 with a $.40 gap November did not change, so sell March it would go up from $5.54 to $5.74 and store buy November take delivery so sell in March take the $.40 difference but it only cost $.20. There is a risk-free arbitrage opportunity there. This price relationship between November and March, $.40 but will come back down due to everybody wanting in which may reduce back down to the price of storage. The arbitrage of buying in my market selling in another to make a profit Will ensure for a storable commodity, The temporal prices I will never exceed the full cost of storage. This is known as the full carrying charge market.
More distant future price the higher it is accommodate stores.
In the attached photo, the week prices drop as time passes for the futures contracts. The December will go up to March drop in September. At this point there is a harvest. In this case there is a negative during charge. There is a backwardation or inversion when there is a star Carrie from the old crop to the new crop. The market will then send the signal to these producers, The soy market to be sending a positive message for carrying storage. For wheat, The market is saying to not caring or store with an inventory since there’s no positive return to carry it forward. Because there’s a shortage can be a backwardation or inverse relationship in the market.
In the attached chart future and cash price pattern storable commodity. There is a time. For December March and July contract
The spot price of 250 in August to December $.20 spread, August to March spread cost of storage is $.35 where there is a discount after July $.10. So the market is not willing to pay the cost of storage on wheat at harvest time
The same example to be applied to the oil market as well where at certain times of the year can be over production which results in temporary shortages. This is when the market can go inverted for storable commodity.
In the attached chart we expect the spot price from August to go up in March to factor in the cost of storage. Used to factor in the interest rate for the opportunity cost for storing. Even for news events we should expect the spread to stay the same throughout the year.
Refer to this attached spatial price relationship for commodity like heating oil. Because of the men will shift to the right in the winter, because inventory cost are moved forward it reduces the wild price range from summer to winter. Supply and demand is what ties these commodities together. Supply can be higher than demand at a certain price in the summer. If the price is $.42 in the summer The market would not clear. This means that some of the production goes into storage. At $.42 we produce 1000 units with the demand is is 800 units so 200 units going to storage. As we raise the price in the summer volume going into inventory is equal to the horizontal distance between supply and demand so you’ll see A curve called s of i on the inventory supply and demand curve. This is where the market clears in the summer. This is derived from the supply and demand of the summer which is the horizontal difference between supply and demand.
For winter, the market demand with the higher which would clear that’s $.50. Since merchants would want to store, that we could go down to $.48 were demand is greater than supply. If you go down the $.45 the difference between demand and supply even higher. If you were the price that the demand Will rise while supply will fall. Difference between demand and supply Will be transferred to the curve to the far right towards inventory supply and demand. This is D of i and the curve. This is the same as the difference between s of w and d of w for winter. Market will clear at $.50.
You also need to factor in the cost of storage with this chart.
If the storage is $.15 per gallon this also Will limit storage. If you buy at 40 and started at 50 with the $.10 return, so no one will store if the storage fee is $.15 per gallon. Storage only take place if it is less than the price spread in the absence of storage.
If you shift The supply plus the fixed storage cost by four cents a unit. You can now have a market equilibrium of supply and demand with storage is factored in. You just include to supply and demand with inventory costs. You will have the new chart with a market equilibrium of quantity Q5 from pricing Summer to winter. This will include this distance between Q1 Q2 and Q3 to Q4. For summer, Price can still go up as people expect to put it into storage. As the demand increases in winter you can expect a price drop from $.50-$.47 as it is drawn out of Storage.
See attached chart a forecast of cold weather example
The demand for oil will shift to the right. The result is is that the D of I will shift up to the right on the inventory supply and demand curve.
Dw – sw = di
Demand in winter minus supply affects d of i future
Excessive supply or ES S is equal to Ds – Ss
The market equilibrium could be .40 where the market will clear for no storage. The market may clear at $.43 see attached charts
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