Cash settlement of futures contracts: An economic analysis

Garbade, Kenneth D.; Silber, William L.

doi:10.1002/(sici)1096-9934(200001)20:1<19::aid-fut4>3.0.co;2-n

Cited by 4 publications

(5 citation statements)

References 7 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…Chan and Lien (2002) Examine the feeder cattle futures after replacement of settlement method with cash settlement by Chicago Mercantile Exchange, to discuss that cash settlement will improve convergence between cash and futures prices and cut off the basis variability, using the stochastic volatility models they found the basis variability was reduced and a change was persuaded in the structural relationship between spot and futures prices, also futures market has improved its efficiency. Garbade and Silber (2000) discussed the issues related to the settlement method such as explores the specific elements that make the cash settlement more or less necessary and whether it should be optional or obligatory, they also examine how should the cash settlement index to be constructed and deals with the unique cash settlement of futures contract on heterogeneous grades of the similar commodity. Their results suggest that the cash settlement can expand the contribution of futures contracts to economic benefit in some way, promote closer convergence of cash and futures price, improve risk transfer function and hedging of futures contract, delivery cost saving, and whether multiple product varieties are significant cash settlement is permitting a market-basket contract by adding flexibility to contract design.…”

Section: Literature Reviewmentioning

confidence: 99%

Exploring the Effect of Physical Delivery V/S Cash Settled Futures Contracts with the Prospective of Obligatory Delivery in Islamic Contract of Sales

Adil

Siddiqui

2019

International Journal of Social and Administrative Sciences

View full text Add to dashboard Cite

This study emphasizes that either physical delivery or cash settlement method for futures contract is better for precious metal such as gold and the storable commodities like rice, wheat, sugar, as well as check the effect of both settlement method on the volatility of futures and spot price. To examine the issue we use bivariate GARCH model to discover the interaction between the spot price return and futures price return. The result shows basis variability of spot price and futures prices returns was substantially reduced in the case of physical delivery as compare to the cash settlement of same commodities, which means the physical delivery is more reliable for the rice, wheat, sugar, and gold futures contracts. In addition, physical delivery settlement method is better than the cash settlement because it covers the gap of demand and supply in the market which effect on price and the physical delivery method is more reliable, as it restricts the liquidation of futures contact which declines the price and provide the social benefit as well.Contribution/ Originality: This study contributes to the existing literature of settlement method of futures contracts effects on the spot and futures prices.

show abstract

Section: Literature Reviewmentioning

confidence: 99%

Exploring the Effect of Physical Delivery V/S Cash Settled Futures Contracts with the Prospective of Obligatory Delivery in Islamic Contract of Sales

Adil

Siddiqui

2019

International Journal of Social and Administrative Sciences

View full text Add to dashboard Cite

show abstract

“…Designers of cash settled futures contracts rely on "good" underlying cash prices, which are typically aggregated to create a "settlement index" (Jones, 1982;Garbade and Silber, 1983). Furthermore, the contract designer must select an expiration interval: the amount of time over which to calculate the final settlement index.…”

Section: Introductionmentioning

confidence: 99%

“…First, a cash index must be created or identified. This index must contain "good" cash prices that accurately reflect commercial value and are not prone to manipulation (Jones, 1982;Garbade and Silber, 1983). A good cash index should account for important pricing factors, such as location and quality, to assure a meaningful relationship between the cash index and specific local markets.…”

Section: Introductionmentioning

confidence: 99%

Contract Design: A Note on Cash Settled Futures

Manfredo

Sanders²

2003

Journal of Agricultural &Amp; Food Industrial Organization

View full text Add to dashboard Cite

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.

show abstract

“…Garbade and Silber (1983b) compare the welfare e ects of physical delivery and cash settlement. 6 This was rst noted by Garbade and Silber (1983a), but does not necessarily hold if there are options on the futures contract, see Lien and Wong (2002), or dynamically complete markets.…”

Section: Introductionmentioning

confidence: 99%

The Impact of Delivery Risk on Optimal Production and Futures Hedging *

Adam-Müller¹,

Wong²

2003

Review of Finance

View full text Add to dashboard Cite

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractMultiple delivery speci cations exist on nearly all commodity futures contracts. Sellers are typically allowed to choose among several grades of the underlying commodity. On the delivery day, the futures price converges to the spot price of the cheapest-to-deliver grade rather than to that of the par-delivery grade of the commodity. This imposes an additional delivery risk on hedgers. This paper derives the optimal production and futures hedging strategy for a risk-averse competitive rm in the presence of delivery risk. We show that, depending on its relative valuation, the delivery option may induce the rm to produce more than in the absence of delivery risk. If delivery risk is additively related to commodity price risk, the rm will under-hedge its exposure to commodity price risk. If delivery risk is multiplicatively related to commodity price risk, the rm will under-or over-hedge this exposure. For constant relative risk aversion, this is illustrated by a numerical example. JEL classi cation: G11, D81Keywords: delivery risk, futures, risk management, production * We gratefully acknowledge nancial support from the Germany/Hong Kong Joint Research Scheme provided by the German Academic Exchange Service (DAAD) and the Hong Kong Research Grants Council (RGC). We would like to thank Günter Franke and Donald Lien for very helpful comments and Harald Lohre for valuable research assistance. Remaining errors are our responsibility. 1The impact of delivery risk on optimal production and futures hedgingMultiple delivery speci cations exist on nearly all commodity futures contracts. Sellers are typically allowed to choose among several grades of the underlying commodity. On the delivery day, the futures price converges to the spot price of the cheapest-to-deliver grade rather than to that of the pardelivery grade of the commodity. This imposes an additional delivery risk on hedgers. This paper derives the optimal production and futures hedging strategy for a risk-averse competitive rm in the presence of delivery risk. We show that, depending on its relative valuation, the delivery option may induce the rm to produce more than in the absence of delivery risk. If delivery risk is additively related to commodity price risk, the rm will under-hedge its exposure to commodity price risk. If delivery risk is multiplicatively related to commodity price risk, the rm will under-or over-hedge this exposure. For constant relative risk aver...

show abstract

Cash settlement of futures contracts: An economic analysis

Cited by 4 publications

References 7 publications

Exploring the Effect of Physical Delivery V/S Cash Settled Futures Contracts with the Prospective of Obligatory Delivery in Islamic Contract of Sales

Exploring the Effect of Physical Delivery V/S Cash Settled Futures Contracts with the Prospective of Obligatory Delivery in Islamic Contract of Sales

Contract Design: A Note on Cash Settled Futures

The Impact of Delivery Risk on Optimal Production and Futures Hedging *

Contact Info

Product

Resources

About