Contract Design: A Note on Cash Settled Futures
-
This note presents an intuitive interpretation and expression for pricing cash settled futures contracts. In particular, the choice of the averaging period for the underlying cash index is evaluated. A question arises as to how the choice of the averaging period may effect how the futures contract is priced. In this note, it is shown that under certain assumptions, the behavior of the futures price prior to entering the expiration interval is independent of the averaging interval’s length for storable commodities. However, this is not the case for nonstorable commodities. An examination of the Minneapolis Grain Exchange’s National Corn Index futures provides empirical support for the results. Given the increasing interest in cash settled futures, especially for futures contracts on agricultural commodities, these results should prove useful to futures exchanges when considering contract design. Ultimately, contract design choices are a critical factor in the success of any futures contract. In the context of agricultural futures contracts, successful contracts can contribute to increased social welfare and greater efficiency of the food marketing system.
©2011 Walter de Gruyter GmbH & Co. KG, Berlin/Boston
Articles in the same Issue
- Article
- Cooperative Investment and the Value of Contracting with Transaction Costs
- Tough Love: Optimal Enforcement of Output Quotas in the Presence of Cheating
- Pricing-to-Market versus Residual Demand Elasticity Analysis of Imperfect Competition in Food Exports: Evidence from Germany
- Food Supply Management and Tariffication: A Game Theoretic Approach
- Social Welfare and the Market Power-Efficiency Tradeoff in U.S. Food Processing: A Note
- The Gains and Losses from Agricultural Concentration: A Critical Survey of the Literature
- Explaining Plant Exit in the U.S. Meat and Poultry Industries
- Contract Design: A Note on Cash Settled Futures
- Explaining Price Dispersion for Homogeneous Grocery Products
- An Essay on Cooperative Bargaining in U.S. Agricultural Markets
- Costly (Dis)Agreement: Optimal Intervention, Income Redistribution, and Transfer Efficiency of Output Quotas in the Presence of Cheating
- Inventory Constraints in a Dynamic Model of Imperfect Competition: An Application to Beef Packing
- Some Unintended Consequences of TRQ Liberalization
- Information Pooling and Collusion: Implications for The Livestock Mandatory Reporting Act
- Concentration and Innovation in the U.S. Food Industries
- Vertical Product Differentiation in Theory and Practice
- Agricultural Marketing Institutions: A Response to Quality Disputes
Articles in the same Issue
- Article
- Cooperative Investment and the Value of Contracting with Transaction Costs
- Tough Love: Optimal Enforcement of Output Quotas in the Presence of Cheating
- Pricing-to-Market versus Residual Demand Elasticity Analysis of Imperfect Competition in Food Exports: Evidence from Germany
- Food Supply Management and Tariffication: A Game Theoretic Approach
- Social Welfare and the Market Power-Efficiency Tradeoff in U.S. Food Processing: A Note
- The Gains and Losses from Agricultural Concentration: A Critical Survey of the Literature
- Explaining Plant Exit in the U.S. Meat and Poultry Industries
- Contract Design: A Note on Cash Settled Futures
- Explaining Price Dispersion for Homogeneous Grocery Products
- An Essay on Cooperative Bargaining in U.S. Agricultural Markets
- Costly (Dis)Agreement: Optimal Intervention, Income Redistribution, and Transfer Efficiency of Output Quotas in the Presence of Cheating
- Inventory Constraints in a Dynamic Model of Imperfect Competition: An Application to Beef Packing
- Some Unintended Consequences of TRQ Liberalization
- Information Pooling and Collusion: Implications for The Livestock Mandatory Reporting Act
- Concentration and Innovation in the U.S. Food Industries
- Vertical Product Differentiation in Theory and Practice
- Agricultural Marketing Institutions: A Response to Quality Disputes
