44 lines
4.0 KiB
Plaintext
44 lines
4.0 KiB
Plaintext
47
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Linking ContraCts for Long-term Chart anaLysis
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December coffee falls 5 cents/lb to 133.50—a 3.6 percent drop. A nearest futures price series will
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show the following closing levels on these two successive days: 132.50 cents, 133.50 cents. In other
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words, the nearest futures contract would show a one-cent (0.75 percent) gain on a day on which longs
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would actually have experienced a huge loss. This example is by no means artificial. Such distortions—
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and indeed more extreme ones—are quite common at contract rollovers in nearest futures charts.
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The vulnerability of nearest futures charts to distortions at contract rollover points makes it desir-
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able to derive alternative methods of constructing linked-contract price charts. One such approach
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is detailed in the next section.
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Continuous (Spread-adjusted) price Series
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The spread-adjusted price series known as “continuous futures” is constructed by adding the cumulative dif-
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ference between the old and new contracts at rollover points to the new contract series.
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1 An example should
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help clarify this method. Assume we are constructing a spread-adjusted continuous price series for gold
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using the June and December contracts.
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2 If the price series begins at the start of the calendar year, initially the
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values in the series will be identical to the prices of the June contract expiring in that year. Assume that on the
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rollover date (which need not necessarily be the last trading day) June gold closes at $1,200 and December
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gold closes at $1,205. In this case, all subsequent prices based on the December contract would be adjusted
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downward by $5—the difference between the December and June contracts on the rollover date.
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Assume that at the next rollover date December gold is trading at $1,350 and the subsequent June
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contract is trading at $1,354. The December contract price of $1,350 implies that the spread-adjusted
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continuous price is $1,345. Thus, on this second rollover date, the June contract is trading $9 above the
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adjusted series. Consequently, all subsequent prices based on the second June contract would be adjusted
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downward by $9. This procedure would continue, with the adjustment for each contract dependent on the
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cumulative total of the present and prior transition point price differences. The resulting price series would
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be free of the distortions due to spread differences that exist at the rollover points between contracts.
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The construction of a continuous futures series can be thought of as the mathematical equivalent
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of taking a nearest futures chart, cutting out each individual contract series contained in the chart,
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and pasting the ends together (assuming a continuous series employing all contracts and using the
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same rollover dates as the nearest futures chart). Typically, as a last step, it is convenient to shift the
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scale of the entire series by the cumulative adjustment factor, a step that will set the current price
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of the series equal to the price of the current contract without changing the shape of the series. The
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construction of a continuous futures chart is discussed in greater detail in Chapter 18.
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1 T o avoid confusion, readers should note that some data services use the term continuous futures to refer to linking
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together contracts of the same month (e.g., linking from March 2015 corn when it expires to March 2016 corn,
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and so on). Such charts are really only a variation of nearest futures charts—one in which only a single contract
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month is used—and will be as prone to wide price gaps at rollovers as nearest futures charts, if not more so.
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These types of charts have absolutely nothing in common with the spread-adjusted continuous futures series
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described in this section—that is, nothing but the name. It is unfortunate that some data services have decided
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to use this same term to describe an entirely different price series than the original meaning described here.
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2 The choice of a combination of contracts is arbitrary. One can use any combination of actively traded months
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in the given market. |