| An Exchange for Physicals (EFP) allows commercial traders to perform a physical and a futures transaction simultaneously with the same trading partner, the futures transaction taking place outside the trading pit. This dissertation demonstrates that EFPs are an important, yet unrecognized aspect of futures markets. It makes use of data about every one of 65,000 EFPs on the coffee, sugar and cocoa futures markets in New York, between 1993 and 1997, and information collected in interviews with commercial firms.; An analysis of the data provided by the New York Board of Trade shows that not only the proportion of EFPs to total volume, but also the volume of EFPs itself, the average size of the EFPs, and the timing of their execution differs from month to month and year to year. An Accelerated Failure Time (AFT) model is used to estimate the effect of several economic variables on the timing of EFP transactions. The resulting elasticities show the expected signs in most cases. However, when calculating them by commodity, year or delivery month, non-trivial differences are found in each of the three markets.; For coffee in particular, between 1993 and 1997, the statistical estimation suggests that the elasticity of duration to: (i) open interest, (ii) intra-day volatility, and (iii) the interest rate is positive, causing EFPs to be executed early in the life of the contract. The elasticity to (i) trading volume and (ii) price volatility (iii) price spreads is negative, leading to later execution of EFPs, closer to expiration. The findings agree with previous studies on deliveries that demonstrated how negative price spreads cause traders to deliver on their contracts later.; The increasing use of EFPs in commodity futures markets is a consequence of a larger presence of commercial traders in futures markets. The prospect of a later EFP encourages commercials to initiate the futures position. In addition, the findings of this study support the perspective that commercial firms' use of futures markets results more from commercial opportunities tempered by transaction costs than risk aversion, as commonly thought. |
