Research Papers: 

1.  Price Transmission across Commodity Markets: Physical to Futures

Abstract:  Primary commodity prices are generally determined in dual markets: a physical--spot market dominated by supplier--producers and a forward--futures market where consumers, producers, and speculators interact. While the futures market operates on an almost continuous basis, spot markets only open at predetermined short periods over which the state of supply and demand is revealed. This poses a challenge for the question of price dynamics: which market leads/follows and where does price discovery occur? We perform an empirical analysis using spot and futures coffee prices and find that most permanent price information originates from the spot market. In a VECM model using two futures prices from international exchanges and spot prices from the Nairobi Coffee Exchange, we find that price discovery takes place in the spot market, with a mean of 63% information share.  

2.  Hedging under Price and Demand Risk (in progress)

Abstract: Using data from the Nairobi Coffee Exchange, we examine the feasibility of hedging price volatility risk using gap put options written on the realized one-week ahead spot price. For the two-week window we consider, call, and put gap options triggered by a price set at one standard deviation above the previous auction's average price leading to large revenue gains for sellers. Our analysis suggests that physical spot prices from the auction are well approximated by geometric Brownian motion, and can be used to price derivatives that hedge price volatility risk. 

Data

• Multiple data files, including the outcomes of each sale on every auction day over the last five years, are available upon request: g.mbara@uw.edu.pl