The relevence of the current ice cotton no. 2 futures contract delivery specifications

Abstract

This research addresses causes of growing disruptions to traditional cash-futures price relationships, unprecedented volatility, the number of locked-limit days and price behavior symptomatic of squeezes witnessed in the cotton market since 2008. The research finds that relevance of current futures contract specifications is a chief responsible factor in causing such behavior. This conclusion is reached using an inelasticity to arbitrage framework and by examining other contributory factors of recent price behavior and their associated solutions. From this, best fit solutions to problematic price behavior are derived. These solutions are derived from a combination of trends in the cash market and existing literature. Specifically, this study argues by amending the current futures market premium and discount schedule and by permitting a delivery point in Australia objectives of enhancing the three key benefits derived from having a futures market is achieved. This is examined by employing a three pronged approach to detail volume benefits to tenderable supply, linear regression that explores pricing dynamics and by offering scenario analysis. The results provide strong evidence proposed amendments achieve these objectives and argues that these amendments are a best fit solution to divergent interests within the sector. Implications from these findings suggest benefits would accrue to the exchange, farmers, the trade, mills and society. These findings therefore are applicable to the exchange, the CFTC and the cotton trade committee at ICE.