Optimal futures contract design

Tashjian, Elizabeth

doi:10.1016/1062-9769(95)90012-8

Cited by 39 publications

(25 citation statements)

References 5 publications

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“…However, this would reduce the volume of trade in each single delivery contract with respect to the multiple delivery contract. It is known that liquid contracts represent substantially cheaper alternatives for establishing a reasonable hedge than do thinly traded contracts, even if the thinly traded contract offers potentially superior hedging capability (Tashjian, 1995). In fact, futures contracts with actively traded close substitutes are less likely to succeed than are new futures contracts without close substitutes (Black, 1986).…”

Section: Discussionmentioning

confidence: 98%

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Hedging performance of shrimp futures contracts with multiple deliverable grades

Martnez-Garmendia

Anderson

1999

J. Fut. Mark.

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Section: Discussionmentioning

confidence: 98%

“…The existence of the delivery alternative allows the investor to diversify the potential price impact of a short squeeze (Tashjian, 1995). However, in a multiple delivery contract, the economic agent expecting delivery has no certainty regarding the variety of the commodity to be received.…”

Section: Introductionmentioning

confidence: 99%

Hedging performance of shrimp futures contracts with multiple deliverable grades

Martnez-Garmendia

Anderson

1999

J. Fut. Mark.

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“…Using a more appealing standardization procedure for the underlying commodity may increase its performance (Tashjian [1995]). For example, "entrepreneurship" is positively related to the relative attitude toward futures, meaning that futures are an attractive instrument whenever their use increases the level of freedom in the marketplace.…”

Section: Discussionmentioning

confidence: 99%

A Behavioral Decision-Making Modeling Approach Toward Hedging Services

Pennings¹,

Candel²,

Egelkraut³

2003

Journal of Behavioral Finance

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This paper takes a behavioral approach toward the market for hedging services. A behavioral decision-making model is developed that provides insight into how and why owner-managers decide the way they do regarding hedging services. Insight into those choice processes reveals information needed by financial institutions to improve the design of their financial products. The key elements of the model are related to the characteristics of the owner-managers, thereby exploring the decision units' evaluations of the hedging services provided by futures exchanges. Using structural equation models and data from 467 owner-managers, obtained by means of computer-assisted personal interviews, we find that the elements "exercising entrepreneurial freedom," "perceived performance," and the "owner-manager's reference price" determine their attitude toward using futures. These elements are related to innovativeness, risk attitude, and level of understanding of futures markets.There are a variety of financial instruments available to manage price risk, such as the cash market, futures, options on futures, individually negotiated forward contracts, and various OTC instruments. The functioning of such price risk management instruments has been the subject of extensive academic research, but how and why participants use these instruments has received little attention. Yet financial institutions need such information to develop and market new financial products and to improve existing ones. In this context, a better understanding of the choice process of customers is crucial. valuable insights into the corporate characteristics associated with the decision to use derivatives. However, these studies focus primarily on large corporations, and none has investigated how managers make decisions. Questions involving the how among choices include 1) the type of information managers use when evaluating price risk management instruments, 2) the influence of the manager's decision-making unit on the hedging decision, 3) the level at which (attitudinal) information about alternative price risk management instruments is compared (the level of comparison), and 4) the way this information is compared across alternative price risk management instruments in reaching a decision (the comparison mechanism). This study differs from previous research into derivative usage in two important ways. First, we focus on owner-managers of small and medium-sized enterprises (SMEs), because, unlike in a large corporation, they tend to embody many of the important functions of the enterprise, such as research and development, manufacturing quality control, sales, and accounting. Large corporations tend to have different departments for each function. Moreover, the wealth of an owner-manager of a SME is directly affected by the variance of expected profit, which constitutes an (extra) incentive to consider and control risk by means of hedging (Sarasvathy, Simon, and Lave [1998]; Smith and Stulz [1985]).Second, we develop a behavioral decision-making model that rev...

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“…First, they provide a guide for examining cash settled futures prices. Second, form of cash settlement is a research area that has not previously received a great deal of attention (Tashjian, 1995); yet is a real concern for practitioners and industry researchers (Peterson, 1995). Third, the choice of expiration interval in cash settled futures is important from a performance and regulatory standpoint.…”

Section: Introductionmentioning

confidence: 99%

Contract Design: A Note on Cash Settled Futures

Manfredo

Sanders²

2003

Journal of Agricultural &Amp; Food Industrial Organization

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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.

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Optimal futures contract design

Cited by 39 publications

References 5 publications

Hedging performance of shrimp futures contracts with multiple deliverable grades

Hedging performance of shrimp futures contracts with multiple deliverable grades

A Behavioral Decision-Making Modeling Approach Toward Hedging Services

Contract Design: A Note on Cash Settled Futures

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