(1) is suitable for storage.
An economic function of the futures market is to allocate inventory in the spot market. Holders with a large amount of inventory can have two choices-as long as the goods do not rot or decrease during the holding period, they either sell the inventory or hold it for later sale. The futures market has become an integral part of the spot sales business, providing value preservation services for inventory holders to avoid the risk of price changes. Therefore, the early futures market followed the principle that commodities were not perishable and suitable for storage. Commodities traded in futures mainly include grain, cotton, coffee, rubber and metals. However, with the passage of time, the concept of proper storage is expanding.
First of all, technological progress has further expanded the standard of suitable storage. For example, advanced refrigeration technology can greatly extend the shelf life of perishable goods, and this breakthrough makes goods that are not easy to store become storable. Commodities that are not traditionally suitable for futures trading have the conditions for futures trading, such as frozen eggs, butter and orange juice futures contracts.
Secondly, the price discovery function of the futures market has changed the standard of proper storage. Tomek and Gray (1970) think: "If a commodity does not need to meet future consumption in the form of inventory, and the inventory cost is zero, then today's futures price is the forecast of the spot price in the next month, which is based on the available information related to the future supply and demand of commodities, such as the quantity of commodities, the availability of related substitutes, and the expected changes of supply and demand of this commodity at different price levels." Then, commodities that can be produced continuously and are not easy to store (such as live animals, fresh eggs and soybean meal) can be traded in futures just like seasonal, discontinuous and easy-to-store inventory commodities (such as corn). As long as a commodity can be obtained at any time through production, the commodity used for futures delivery does not have to be in stock at this moment.
Compared with the real thing, the storage of financial products is relatively simple, such as the small size and light weight of national debt, which is very easy to keep; Although the physical storage of money is also easy, due to the use of modern payment and settlement methods such as electronic remittance, it is no longer necessary to use cash for delivery; For stock index futures, because cash delivery is adopted, there is no need to use physical stocks for delivery. So for financial products, the problem of storage and custody has been solved.
(2) homogeneity.
The obvious feature of futures contracts different from forward contracts is that the subject matter of transactions must be standardized commodities. If this homogeneity condition cannot be met, the exchange will not be able to settle accounts for different market participants.
In order to complete the transaction subject matter without visual inspection, detailed writing and oral description (high transaction cost), it is necessary to describe the transaction subject matter objectively and standard in the process of contract design, so that both buyers and sellers know what kind of goods they can buy or must deliver. Hoffman (1932) thinks that in order to simplify and make the delivery grade accurate, it must be based on measurable physical quantities. If a commodity lacks a quality standard system generally recognized by the government or industry (so that it is impossible to distinguish the same grade), then it is doomed to fail to meet the requirements of futures trading. Tea and tobacco are more commodities that need personal evaluation, so it is difficult to distinguish grades by standard methods and it is impossible to conduct futures trading. It should be said that this feature is more reflected in the varieties of agricultural products.
(3) Price fluctuation.
Price fluctuation plays an important role in attracting two basic participants-hedgers and speculators-to enter the futures market. Telser( 198 1) believes that price change is one of the important commodity characteristics that determine whether a commodity is suitable for futures trading. His research results using cost-benefit theory show that the change of price fluctuation determines the appearance (disappearance) or growth (decrease) of a commodity futures transaction. He believes that if the price fluctuation of a commodity decreases, the demand for hedging will decrease, the trading volume of futures will decrease, the market liquidity will decrease, the transaction costs of investors' commissions, deposits and so on will increase, and higher transaction costs will aggravate the reduction of trading demand, thus further affecting the trading volume. Rising price fluctuations make this process develop in the opposite direction. Greater demand increases the transaction volume of contracts, thus increasing liquidity and reducing costs, thus increasing the transaction demand. For speculators, there is a chance to earn the price difference only if there is price fluctuation, so the price fluctuation rises, the profit opportunities increase and the speculators' willingness to participate increases. The emergence of financial futures lies in the fluctuation of exchange rate and interest rate price after the implementation of floating exchange rate system and interest rate marketization. In the 1980s, the price of silver in the United States changed by 4% every year, while the price of gold changed by only 1% or less, which made the futures trading volume of silver exceed that of gold (gold was the most active precious metal market in the past).
(4) Sufficient spot scale.
There should be sufficient spot supply and demand for futures commodities for three reasons: first, adequate commodity supply helps to avoid price monopoly. If the supply of a commodity is limited, it will be very easy for participants with large financial funds to control the price. Second, a large number of market participants help to provide a large number of potential hedgers for futures trading. Third, an adequate spot market helps to provide a continuous and orderly supply and demand force, which is conducive to the realization of delivery and spot arbitrage. Some scholars believe that the spot circulation scale of commodities suitable for futures trading should exceed $5 billion.
(5) Unlimited supply.
Unlimited supply of goods has two meanings: first, there is no government control or monopoly in the market; The second is that the distribution cost is lower. Specifically:
1 the price formed by perfect competition. If the market supply of a commodity is completely controlled by the government and a few monopolists, the futures market of this commodity cannot prosper, and the monopolist with spot control ability can determine the spot price (or at least strongly influence the price), thus manipulating the futures price. From 1979 to 1980, someone tried to manipulate the US silver futures price. Although the manipulation didn't succeed in the end, the trading volume of silver futures in the New York Mercantile Exchange and Chicago Board of Trade (CBOT) decreased by 74% and 83% respectively.
Government intervention in the market will also affect the degree of participation in the futures market. For example, the government's large national reserves will reduce or even disappear the futures trading of related commodities. For example, cotton futures trading in the United States became active only after the government deregulated.
2 Lower distribution cost. The existence of delivery cost will reduce the possibility of spot arbitrage. If the delivery cost is high, even if there is a big difference between the futures price and the spot price, there will be no arbitrage motivation, so the futures price and the spot price cannot return. Higher delivery costs are usually related to the following factors: (1) When the goods arrive at the delivery place, additional transportation costs are incurred, and the goods available for delivery are only available in inconvenient places, which may be mainly caused by unreasonable setting of the delivery place; (2) Make the physical object in a deliverable state for a long time. This may be mainly due to the management system of the seller's enterprise, or at least the intention to manipulate the price, or the high cost of transforming the physical object from the spot to the state that can be used for futures delivery. These "abnormal" factors lead to high delivery costs, even in the United States, which leads to a series of problems in the futures trading of wheat, corn, cotton, especially potatoes.
In order to solve the circulation problems encountered in physical delivery and reduce the delivery cost, the cash delivery system is introduced into futures trading. Cash delivery is a delivery method that does not require the use of physical objects. In this way, many commodities that are traditionally unsuitable or difficult to achieve physical delivery can be traded in futures, such as cattle futures, potato futures and stock index futures.
(6) OTC trading.
Because there is no exchange as the guarantor of performance, the forward contract faces the risk of counterparty default, and the forward contract is only a bilateral agreement, so it is difficult to close the position before the settlement date, while the market participants in the futures market can hedge and close the position at any time before the delivery date. Nevertheless, over-the-counter trading still has a certain substitution effect on futures trading. Futures trading is to extend the performance time of the contract, thus avoiding the price risk. But for hedgers, the most efficient way is just to extend the delivery period, and there is no need for standardized contracts. Forward contracts can make the delivery date, specific delivery goods, quantity, price and other trading conditions more in line with the requirements of both parties, and to some extent make up for the performance risk and the problem of hedging. But so far, we can't draw the conclusion that OTC and futures trading are mutually exclusive. For example, most foreign exchange transactions in the world are concentrated on over-the-counter transactions, but the GNMA deferred delivery market and GNMA futures market in the United States have been successful at the same time.
Above, we summarized the commodity characteristics of futures contracts, but in the practice of futures trading, although many commodities meet the above conditions, they still failed, and some commodities succeeded even if they did not fully meet the above conditions. For example, coffee beans are subjectively graded, and GNMA has a forward trading market. Therefore, pure commodity characteristics cannot explain all the contents of the success of futures contracts. On the basis of studying the commodity characteristics of futures contracts, the design of futures contracts is studied. The design of futures contract terms is the key factor that affects the trading interest of market participants. According to trading interests or trading purposes, participants in the futures market can be divided into two basic types: hedgers and speculators. Let's analyze the contract characteristics that affect these two types of participants in futures trading.
The attractiveness of (1) to hedgers.
Keynes thought: "If a futures contract only considers the interests of speculators, there is no hope of success." . To make the market run, there must be real and fundamental hedging motives. "The design of futures contracts is based on the theory of attracting hedgers, which was put forward by Working( 1953). He believes that the trading volume in the futures market is determined by the number of hedges. So how to design contracts to attract hedgers? Many futures contracts were originally listed for commercial purposes. Work (1970) puts forward that "the terms of futures contracts should conform to the operation mode of spot trading. "Because spot enterprises participate in futures trading in order to avoid price risks, and effective hedging depends on the high correlation between spot prices and futures prices, it is necessary to make the subject matter of futures trading as close as possible to spot commodities. Arbitrators can hold both future positions and spot. When there is a difference between the current price and the spot price, they may make physical delivery. Only when the subject matter of futures trading is basically the same as that of spot goods, can the smooth physical delivery be guaranteed. Therefore, in order to attract hedgers, futures contracts should not only make the subject matter of futures contracts as consistent as possible with spot goods, but also make the delivery rules of futures contracts as consistent as possible with the circulation habits of spot goods.
The loss of hedging is an important reason for the invalidation of futures contracts. Wheat futures trading in the United States is a typical example. The Kansas Mercantile Exchange (KCBT) was once the most important hard winter wheat futures market in the United States. On 1940, KCBT amended the contract to allow soft red wheat to be delivered instead. At that time, due to the price, only hard winter wheat could enter the delivery. But at 1953, the price relationship changed, and soft red wheat became the cheapest delivery variety. Because the futures price of this contract no longer reflects the changing trend of hard winter wheat price, hard winter wheat hedgers began to shift from KCBT to the hard spring wheat futures market of Minneapolis Exchange (MGE) and the soft red wheat futures market of CBOT. Because the CBOT soft red wheat futures market has high liquidity and the transaction cost is lower than that of KCBT, and because the hedgers of hard winter wheat must be forced to replace hedging, their transactions will inevitably flow to the market with the lowest transaction cost on the premise of reducing the price risk. Therefore, in the second half of 1953, the empty orders and trading volume of KCBT wheat futures contracts dropped sharply because of the losses of hedgers. When CME (1961) first launched the frozen pork belly contract in September, although the operating environment was very ideal, there were great differences between the terms of the contract and the spot transaction, such as the restrictions on storage time, storage mode and grade, and so on, and the transaction remained inactive. It was not until three years later (1964) that the exchange revised these terms and conditions that the short positions and trading volume of the contract began to increase significantly. The reason is that futures and spot markets are closer, and the hedging effect is improved by modifying the contract. Therefore, the design of futures contracts should be consistent with spot management, which is very important to attract hedgers successfully.
(2) Attraction to speculators.
Gray (196 1, 1966, 1967) found that it is difficult to reach a balance between short hedging positions and long hedging positions, and the unbalanced part needs to be filled by speculative positions, otherwise there will be a big price deviation. A certain amount of hedging positions need more speculative positions to adapt to it. Moderate speculation is conducive to improving the efficiency of hedging. One of the criteria for judging hedging efficiency is hedging cost. In the market with small trading volume and inactive trading, it is difficult to find a suitable price for hedging trading, and it is also difficult to close the position and end hedging at the right time, which undoubtedly increases the cost and risk of hedging, leads to the reduction of hedging and eventually leads to the disappearance of the futures market. Therefore, hedgers prefer highly liquid markets. The higher the liquidity of the futures market, the easier it is for hedgers to enter and leave the market. Woking believes that "although a large number of speculative transactions in the futures market seem to rely on hedging, hedgers prefer to use the exchange with the largest speculative trading volume for varieties that are traded on multiple exchanges at the same time."
1 Cross-market arbitrage speculation on similar contracts with poor liquidity. American economists analyzed the role of speculators in CBOT, KCBT and MGE wheat futures markets. Initially, most hedgers prefer wheat futures contracts of KCBT and MGE due to the delivery location and delivery grade. However, CBOT is the largest wheat futures market in the United States, with the largest number of speculators and various types of wheat delivery. When unbalanced hedging orders (when short and long positions are not equal) hit KCBT and MGE, their prices began to deviate from CBOT wheat prices. The increase in the hedging cost of KCBT and MGE finally makes the hedgers move to CBOT, because the increase in transaction cost exceeds the improvement of hedging effect. However, on the other hand, professional investors will also carry out cross-market arbitrage transactions on CBOT, KCBT and MGE wheat futures contracts. Gray regards this arbitrage activity as "transferring speculation to markets lacking speculative transactions to support these markets to tide over the speculative shortage period". He believes that the existence of KCBT and MGE wheat futures is mainly due to the large number of speculators in CBOT. However, in the long run, similar futures contracts with poor liquidity cannot attract hedgers due to insufficient speculation, and a large number of arbitrage transactions will narrow the price difference between markets and eventually lead to the demise of affiliated contracts.
2 Hedging contracts borrow speculation similar to speculative contracts. CBOT's GNMA futures contract (hereinafter referred to as GNMA-CDR contract) stipulates that the CDR of GNMA certificates of deposit is used to deliver the GNMA futures contract after converting the price according to a fixed formula. For GNMA hedgers, CDR price and GNMA(CD) futures price have a strong correlation with spot price, which can reduce the basis risk. Therefore, on 1978, American Express Mercantile Exchange (ACE) and CBOT simultaneously launched GNMA-CDR contracts to attract hedgers, and GNMA-CDR contracts attracted most speculative funds. In CBOT, GNMA-CD is traded in the GNMA-CDR trading pool, because the GNMA-CD contract is "borrowed" from the GNMA-CDR market and is becoming more and more active. However, ACE only has the GNMA CD contract, which is its main product. The contract stopped trading on 1980.
Narrow the contract specifications to attract speculation. In the futures market, the number of hedgers is small and the transaction amount is large. In addition to large institutional investors, there are a large number of small and medium-sized speculators, who are also an important group to provide market liquidity. The size of futures contract specifications should not only refer to the spot business habits of related products, but also consider the attractiveness to small and medium speculators. If the contract specification is too small, it may bring inconvenience to spot enterprises, but if the contract scale is too large, small and medium-sized speculators will be unable to participate because of lack of funds, which will affect the activity of the contract. American silver futures trading was concentrated in the New York Mercantile Exchange before 1969, when trading was very active. Its contract specification is 10000 ounces/sheet. 1969165438+10, CBOT launched a slightly modified silver futures contract with a specification of 5,000 ounces per piece, which was a great success and attracted more than 30% of silver futures trading volume within two years. The New York Mercantile Exchange realized that the reduction of contract specifications promoted the trading scale, so they also reduced the contract specifications of silver to 5000 ounces in 1974 to prevent further loss of market share. At 198 1, CBOT further reduced the contract specification to 1000 ounces.
(3) prevent manipulation.
While paying attention to attracting speculators and hedgers, if there is potential danger of manipulation, contract design will directly affect the willingness of investors, especially hedgers. Therefore, another goal of futures variety innovation is to design a futures contract that is difficult to manipulate.
The term of a futures contract requires that the balance of physical objects and funds must be completed when the contract expires. However, because the actual deliverable quantity of physical goods in the spot market is usually limited, there may be an imbalance between physical goods and funds, which may lead to delivery risks. In the month of general contract trading, the trading environment of buyers and sellers is basically similar. However, as the expiration date (delivery date) of the contract approaches, if one party shows obvious financial advantage or material advantage (natural reasons or deliberate manipulation) in the transaction, the normal transaction of investors will be affected by frequent risks, and such contracts usually need to be revised.
In contract design, an important way to prevent price manipulation is to increase the level of goods or delivery locations that can participate in delivery, and to achieve delivery by setting a certain quality premium for goods close to delivery standards or setting a certain regional premium for delivery locations outside the delivery benchmark, thus increasing the physical quantity available for delivery. However, it should be pointed out that this method will also encounter some thorny problems:
First of all, the effectiveness of hedging requires that the term and spot price must have a strong correlation. A contract with a single delivery level is most attractive to hedgers of this level of goods, because the delivery level is clear and the spot price of the futures price reference pricing is also clear accordingly. At this time, the spot price has the strongest correlation and can be returned better on the expiration date of the contract. When there are many grades or types of substitutes, the seller will inevitably tend to deliver the cheapest grade, so the uncertainty of what kind of goods the buyer can get at the time of delivery will increase. Similarly, after the delivery place increases, the uncertainty of where the buyer can get the goods at the time of delivery will also increase. The more substitution levels and delivery locations, the greater the uncertainty, and the greater the possibility that the overall effect of hedging will be affected.
Secondly, the design of lifting water and pasting water is very important. Increasing the quality discount or reducing the quality premium will help to improve the delivery probability of the delivery standard, so that the futures and spot prices can maintain a good correlation, but this will affect the expansion of available physical delivery. If the regional premium is too small or too large, it will lead to little actual delivery at delivery points other than the benchmark delivery place, but it will reduce the actual delivery volume at the benchmark delivery place, both of which increase the management cost and have no effect on expanding the delivery volume. Therefore, it is necessary to find a premium standard that can take into account the two goals of "spot price correlation during the retention period" and "expansion of available physical delivery". Therefore, it is necessary to improve the rationality of the premium design. Quality promotion and discount mainly depend on the difference of intrinsic quality and practical value between physical commodity grades, so it is easier to determine. Regional premium is mainly related to the transportation cost and spot price between regions. If the transportation cost and regional price difference change frequently, the regional premium needs to be constantly adjusted, which will inevitably lead to unstable transaction costs. Therefore, it is necessary to have a more standardized, mature and unified spot market to determine a reasonable and stable regional discount.