Reallocating the right to choose the delivery grade in futures markets

Document Type

Article

Publication Title

Theoretical Economics Letters

Abstract

We study the futures valuation and market manipulation implications of reallocating the right to choose the delivery grade from the short to the long futures position and show that the futures price will converge to the price of the most expensive-to-deliver grade asset at delivery. The shifting of the delivery grade option to the long has the potential to mitigate excessive selling of futures contracts in a crisis, thus contributing to price stabilization. However, it may distort the incentives for the longs, leading to large futures and “corner and squeeze trades to raise the delivery time spot price above the locked-in futures price.

Publication Date

29-3-2019

Publisher

Scientific Research Publishing Inc

Volume

Vol.9

Issue

Iss.4

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