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Long-Dated Agricultural Futures Price Estimates Using the Seasonal Nelson-Siegel Model

Author(s): Jason West

Journal: International Journal of Business and Management
ISSN 1833-3850

Volume: 7;
Issue: 3;
Date: 2012;
Original page

Over the counter (OTC) forward contracts are regularly traded by hedgers at maturities beyond the longest-datedfutures contract. The presence of seasonality in agricultural commodities creates additional uncertainty forobtaining fair prices for OTC forward contract trades beyond the liquid futures strip. This paper employs anaugmented Nelson-Siegel function to obtain seasonal agricultural commodity price estimates for OTC forwardcontracts beyond the longest available maturity of exchange traded futures contracts. A multifactor seasonalNelson-Siegel model is chosen due to its internally consistent and parsimonious functional form. TheNelson-Siegel approach is used to model seasonally adjusted corn, cotton and sugar forward prices for OTCcontracts out to five years maturity calibrated against shorter-dated futures contracts. Residual and contractliquidity testing indicates that the seasonal model provides efficient estimates of contract prices beyond thefutures strip which allows agricultural commodity hedgers to obtain fair prices for OTC forward contracts.
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