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INTERCOMMODITY SPREADS: DETERMINING CONTRACT RATIOS
 In the preceding example, because wheat is a larger contract than corn (in dollar-value terms), 
a long 1 wheat/short 1 corn spread would be biased in the direction of the general price trend of 
grains. For example, during November 2012–August 2013, a period of declining grain prices (see 
Figure   31.4   ), the equal  contract spread seems to suggest that wheat prices weakened signifi  cantly 
relative to corn prices (see Figure   31.1  ). In reality, as indicated by Figures   31.2   and   31.3  , the 
wheat/corn relationship during this period was best characterized by a trading range. T o illustrate 
the trading implications of the spread ratio, consider a long wheat/short corn spread initiated at the 
late-November 2012 relative high and liquidated at the August 2013 peak. This trade would have 
resulted in a near breakeven trade if the spread were implemented on an equal-dollar-value basis 
(see Figure   31.2   or   31.3  ), but a signifi  cant loss if an equal contract criterion were used instead (see 
Figure   31.1  ).  
 It should now be clear why the standard assumption of an equal contract position is usually valid 
for intramarket spreads. In these spreads, contract sizes are identical, while price levels are normally 
close. Thus, the equal-dollar-value approach suggests a contract ratio very close to 1:1. 
  If, however, two contracts in an intramarket spread are trading at signifi  cantly diff  erent price 
 levels, the argument for using the equal-dollar-value approach (as opposed to equal contract  positions) 
would be analogous to the intercommodity and intermarket case. Wide price diff  erences between 
contracts in an intramarket spread can occur in extreme bull markets that place a large premium on 
    FIGURE  /uni00A031.4    September 2013 Wheat and September 2013 Corn