Cocoa@Spread

Discussion in 'Ag Futures' started by maninjapan, Nov 18, 2009.

  1. Ive had a look at the LIFFE and NYMEX Cocoa contracts and there seems to be a discount/premium between them (after accounting for the currency difference). I saw that the LIFFE contract is actually delivered on while the NYMEX contract is cash settled. Is there any explanation for the difference here?

    Thanks.
     
  2. smalls

    smalls

    if one is deliverable, and the other is cash.
    there is a step to convert the deliverable into cash, the step to convert to cash is where the premium comes from (my best guess, and someone smarter then I hopefully will correct me if that is the case).
     
  3. Smalls, thanks that definately makes sense. I wonder if anyone out there who trades both has anything to add to this?

    Cheers
     
  4. latidude

    latidude

    I trade the spread. You might want to look up "convenience yield" on Wikipedia.
     
  5. Latitude, thanks for the tip. I had a read, but it seems to be talking about the difference between spot and futures. How does one relate that to the LIFFE/ICE spread if you are spreading the same month? In this case would the Liffe contract act more like the physical due to the fact it is actually deliverable?
    Or does the actual spot price play into this somehow?


    Thanks, and look forward to your reply
     
  6. trading nymex softs is asking for trouble, no liquidity...ICE is the main contract in the US
     
  7. yep, staying well away from Ice, looking at the Liffe/Ice spread actually. Trying to figure out how convinience yield figures into this.
     
  8. Sorry, that should have rad staying well away from 'Nymex'
     
  9. latidude

    latidude

    Generally speaking futures will settle to the spot, or the spot will be based on the futures price give or take cost of carry, storage, transportation, etc... It varies from product to product and there are times when the final settlement of a futures contract may deviate, but this is the generally accepted relationship for physically settled contracts.

    The cash contract will discount transportation and storage costs, it will however not discount the opportunity cost attributed to interest on cash - thus you will still need to include risk free rate in your calculation.

    The spread between these two products can deviate based on local supply and demand issues, and transportation costs. In the event that one contract trades at a significant enough discount/premium to the other that they would be interchangeable (were they both physically settled), then this might present a very tangible basis trade opportunity. There is a definite arbitrage opportunity, but without understanding the dynamics of each market and pricing the contracts appropriately the trade becomes purely statistical in nature.
     
  10. latitude, thanks for the insight, not quite as straightforward as I thought, but anyway. another day , another lesson learned
     
    #10     Dec 1, 2009