An empirical study of the spot-forward relationship and the hedging efficiency of the Atlantic salmon market

Abstract

This thesis investigates well-established theories of the spot-forward relationship in the derivatives market for Atlantic salmon using futures prices collected at a weekly and monthly frequency ranging from January 2008 to December 2015. It also examines the relationship between time to maturity on futures contracts and hedging efficiency.

The spot-forward relationship is first investigated by an unbiasedness test on forecast error following the same method as Movassagh and Modjathedi (2005) used on the gas market. The test found that forecasting error on price changes between spot and forward is close to zero, indicating an unbiased relationship. Secondly, the theory of storage is examined using both a direct and indirect test that originates from Fama and French (1987,1988). The direct test found evidence to support the theory, as inventory levels were highly significant in explaining the difference between spot and futures prices (basis). The indirect test also found evidence to support the theory of storage as the volatility in prices was higher when the inventory levels were low. Thirdly, the thesis extends on previous studies on the risk premium by adjusting a risk premium model that includes risk production factors first introduced by Asche, Misund, and Oglend (2015). The risk premium was found to be negative on average, which indicate a forward curve in normal backwardation. This is evidence to support the hedging pressure hypothesis. Finally, the hedging efficiency on futures contracts ranging from 1-12months to maturity is analyzed to see if time to maturity on futures contracts is correlated with greater hedging efficiency. The evidence support that hedging efficiency is significantly greater on near month maturity futures contracts compared to distant month futures contracts.