Abstract

Previous research on the effect of fundamental factors upon FCOJ futures prices focused on the effect of decreases in temperature below freezing. However, a large proportion of FCOJ futures price variability remains unexplained. We recognize that the FCOJ futures contract provides an implicit quality option to the seller, by allowing delivery of the cheaper of FCOJ from Florida and FCOJ from Brazil. We value this option and show that it is a substantial percentage (14.7%) of FCOJ futures prices, on average. Our regression of FCOJ futures returns upon changes in the value of the option indicates that futures returns are significantly related to the option value in winter and in spring. Our results also show that the quality option provides substantial incremental (7-10%) explanatory power over that provided by decreases in temperature below freezing. Our research supports the view that futures prices are largely responsive to fundamental factors.