FAIR VALUE PRICING OF AGRICULTURAL FUTURES IN SOUTH AFRICA

In the South African agricultural (specifically grain) markets an interesting phenomenon exists: where futures and options on grain products exist (i.e. white maize, yellow maize, soy beans, wheat, and sunflower seeds) price discovery in the spot (also known as “cash”) markets is poor, whereas price discovery in the futures markets is considered respectable. Consequently, whenever a spot deal is undertaken, this price is “derived” from the relevant futures market. This severely anomalous phenomenon will be evident: futures are generally labeled “derivatives” because their prices are “derived” from their spot markets, whereas here we have a situation where spot prices are derived from their futures price (specifically the price of the near – as opposed to far – future). Because of this unusual phenomenon the mathematics involved is not readily available in the literature; this article is an attempt to briefly outline the phenomenon and to present the relevant mathematics.     

INFLATION TARGETING AND THE FISHER EFFECT IN SOUTH AFRICA: AN EMPIRICAL INVESTIGATION

The paper analyses the relationship between expected inflation and nominal interest rates during a period of inflation targeting in South Africa, i.e. from 2000 to 2005. Specifically, it investigates the Fisher hypothesis that nominal interest rates move one‐to‐one with expected inflation, leaving the real interest rate unaffected. The analysis distinguishes between a short‐run Fisher effect and a long‐run Fisher effect. Using cointegration and error correction models (for monthly data for the period April 2000 to July 2005), it was found that the short‐run Fisher hypothesis did not hold during the relevant period under the inflation targeting monetary policy framework in South Africa. This is attributed to a combination of the South African Reserve Bank's (SARB) control over short‐term interest rates and the effects of the monetary transmission mechanism. The long‐run Fisher hypothesis could not be confirmed in its strictest form: while changes in inflation expectations move in the same direction as the nominal long‐term interest rate. This suggests that monetary policy has an influence on the real long‐term interest rate, which has positive implications for general economic activity, thus confirming the credibility of the inflation targeting framework.