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The Inconvenience Cost: A Portfolio Approach to Non-Convergence Between Cash and Futures Prices

Author

Listed:
  • Adjemian, Michael K.
  • Kuethe, Todd H.
  • Kunda, Eugene L.

Abstract

Cash and futures prices should reach equality, or converge, upon contract maturity. Traders can impose convergence during the delivery month through arbitrage behavior: either making or taking delivery on futures contracts. If convergence is not predictable, a futures market fails to provide a clear storage signal to potential inventory holders and reduces the attractiveness of hedging. Recent convergence problems in domestic commodity markets demonstrate the existence of persistent, significant arbitrage opportunities over the second half of the last decade. Yet, terminal elevator operators—perhaps the only participants with the capacity to do so—have not arbitraged away these riskless returns by making enough deliveries. This model demonstrates conditions under which a profit maximizing warehouseman foregoes available arbitrage. We find that making delivery involves substantial opportunity costs, which stem from the loss of managerial control over warehouse space. We refer to the inconvenience of losing such control as the inconvenience cost.

Suggested Citation

  • Adjemian, Michael K. & Kuethe, Todd H. & Kunda, Eugene L., 2010. "The Inconvenience Cost: A Portfolio Approach to Non-Convergence Between Cash and Futures Prices," 2010 Annual Meeting, July 25-27, 2010, Denver, Colorado 61040, Agricultural and Applied Economics Association.
    • Handle: RePEc:ags:aaea10:61040
    DOI: 10.22004/ag.econ.61040
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    References listed on IDEAS

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    1. Irwin, Scott H. & Garcia, Philip & Good, Darrel L. & Kunda, Eugene L., 2009. "Poor Convergence Performance of CBOT Corn, Soybean and Wheat Futures Contracts: Causes and Solutions," Marketing and Outlook Research Reports 183475, University of Illinois at Urbana-Champaign, Department of Agricultural and Consumer Economics.
    2. Irwin, Scott H. & Garcia, Philip & Good, Darrel L. & Kunda, Eugene L., 2008. "Recent Convergence Performance of CBOT Corn, Soybean, and Wheat Futures Contracts," Choices: The Magazine of Food, Farm, and Resource Issues, Agricultural and Applied Economics Association, vol. 23(2), pages 1-6.
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