Critical Analysis: Risks and returns of the futures industry
Preliminary review of the literature and critical analysis on the risks and returns of the futures market and several investment opportunities such as those concerning mini S and P, crude oil and Eurodollar futures contracts.
The question can adhere as to how before and during recession affects these contracts (Eurodollar futures contracts)? There argues that the futures price volatility increases as the futures contract approaches its expiration. Utilizing of research based data from at most five futures markets in certain futures exchanges, the need to find ample support for critical analysis towards mini S and P, crude oil and Eurodollar futures contracts. For instance, Huang and Stoll (1998, p. 23) places an example from the value of the S&P 500 Index futures contract had grown to five times its value at its inception during April in the year 1982.
Further asserted that, one way to make the contract more accessible to investors and to smooth out trading is to split the contract as proponents believe that splitting the contract could increase transaction costs, although competition would limit the amount of the increase (Huang and Stoll 1998, p. 23). Then, pointed out that, "less clear is the need for increasing the minimum percentage tick size, as the current minimum tick size is small for S&P 500 futures compared with that of other futures and possible common stocks and adhere that the larger tick size could affect returns in volume as it can be through increasing trading costs and reducing the willingness to trade" (Huang and Stoll 1998, p. 23). The need to understand effective usage of equilibrium multifactor model to interpret risks and returns of futures market, Singapore context as noted that priced factors include return on stock index, revisions in forecasts of future stock returns thus, capturing of hedging effects and revisions in forecasts of future labor income growth.
Campbell (1996, p. 298) believes that, the aggregate stock market risk is factor determining excess returns; but in the presence of human capital or stock market mean reversion, the coefficient of relative risk aversion is much higher than the price of stock market risk. Dusak (1973, p. 1387) have noted "long-standing controversy over whether speculators in futures market earn risk premium is analyzed within the context of the capital asset pricing model recently developed by Sharpe, Lintner and others and under the latter approach the risk premium required on futures contract should depend not on the variability of prices but on the extent to which the variations in prices are systematically related to variations in the return on total wealth". Further indicated certain systematic risk were estimated for sample of wheat, corn and soybean futures contracts and found to be close to zero in the cases and average realized holding period returns on the contracts over the same period were close to zero (Dusak 1973, p. 1387).
There has been an issue implying the role that large, managed futures funds and pools play in futures markets. Many market participants argue that managed futures trading increases price volatility due to the size of managed futures trading and reliance on positive feedback trading systems. The purpose is to provide evidence on the impact of managed futures trading on futures price volatility. A unique data set on managed futures trading will have to be analyzed for the period one September 2009 through thirty one December 2009. The data set include daily trading volume of large commodity pools for five diverse futures markets in Singapore. Thus, noting in regression outcomes with respect to impact of commodity pool trading on futures price volatility of the country as commodity trading may not associated with increases in futures price volatility.
The investigation of distribution of futures market risks and returns in variety of contracts as selected from such foreign exchange, equity and interest rate market sectors. Analyze implications for structure of Eurodollar futures volatility as a practical significance because it is an important determinant of the value of such options, Eurodollar futures which are traded on interest rate caps, estimating relationship between standard deviation of Eurodollar futures and contract maturities directly from futures prices. Since contract maturities do not remain constant over time but decline as contracts approach their maturity dates, to calculate standard deviation for given maturity contract there needs to estimate term structure of constant maturity futures prices. Research will show that futures prices can be transformed into linear functions of the factors and that the model's parameters can be estimated by maximum likelihood technique that imposes time series and section restrictions, having rare occurrence in empirical studies of futures market represent significant improvement over corresponding factor version.
References
Campbell J (1996) Understanding Risk and Return. The Journal of Political Economy, Vol. 104, No. 2 (Apr., 1996), pp. 298-345. The University of Chicago Press
Dusak K (1973) Futures Trading and Investor Returns: An Investigation of Commodity Market Risk Premiums. The Journal of Political Economy, Vol. 81, No. 6 (Nov. - Dec., 1973), pp. 1387-1406. The University of Chicago Press
Huang R and Stoll H (1998) Is It Time to Split the S&P 500 Futures Contract?. Financial Analysts Journal, Vol. 54, No. 1 (Jan. - Feb., 1998), pp. 23-35. CFA Institute
Comments