Hostname: page-component-78c5997874-xbtfd Total loading time: 0 Render date: 2024-11-10T02:41:12.642Z Has data issue: false hasContentIssue false
  • English
  • Français

The Delivery Option on Forward Contracts: A Comment

Published online by Cambridge University Press:  06 April 2009

Theodore M. Barnhill
Get access Rights & Permissions [Opens in a new window]

Abstract

Livingston contends that short futures/long cash traders can eliminate the potential costs of the quality option through use of a dynamic trading strategy. It is proposed here that if this is possible then futures prices will never reach a stable equilibrium. Alternatively, if Livingston's argument is flawed, then no risk-free arbitrage opportunities are likely to be available to either short cash/long futures or long cash/short futures traders. Under such conditions, futures prices will reach an equilibrium when the expected return and risk of each type position are equally attractive.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 23 , Issue 3 , September 1988 , pp. 343 - 349
Copyright
Copyright © School of Business Administration, University of Washington 1988

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Barnhill, T. M. “Valuation of the Quality Option and the Switching Option with an Assessment of their Impact on Treasury Bond Futures Prices.” Working Paper No. 152, Columbia Futures Center (05 1987).Google Scholar
Barnhill, T. M., and Jordan, J. V.. “Perspectives on Selection of the Optimal Cash Bond for Arbitraging against the Treasury Bond Futures Contract.” Working Paper No. 145, Columbia Futures Center (12 1986).Google Scholar
Barnhill, T. M., and Seale, W. E.. “Valuation and Optimal Exercise of the Switching Option in Treasury Bond Cash versus Futures Arbitrages.” Working Paper No. 162, Columbia Futures Center (07 1987).Google Scholar
Barnhill, T. M., and Seale, W. E.. ”Optimal Exercise of the Switching Option in Treasury Bond Arbitrages.” Journal of Futures Markets, 8 (forthcoming 08 1988).CrossRefGoogle Scholar
Black, F. “Noise.” Journal of Finance, 41 (07 1986), 529–543.CrossRefGoogle Scholar
Brennan, M. J., and Schwartz, E. S.. “An Equilibrium Model of Bond Pricing and a Test of Market Efficiency.” Journal of Financial and Quantitative Analysis, 17 (09 1982), 301–329.CrossRefGoogle Scholar
Benninga, S., and Smirlock, M.. “An Empirical Analysis of the Delivery Option, Marking to Market, and the Pricing of Treasury Bond Futures.” Journal of Futures Markets, 5 (Fall 1985), 366–374.CrossRefGoogle Scholar
Garbade, K. D., and Silber, W. L.. “Futures Contracts on Commodities with Multiple Varieties: An Analysis of Premiums and Discounts.” Journal of Business, 56 (07 1983), 249–272.CrossRefGoogle Scholar
Gay, G. D., and Manaster, S.. “The Quality Option Implicit in Futures Contracts.” Journal of Financial Economics, 13 (09 1984), 353–370.CrossRefGoogle Scholar
Gay, G. D., and Manaster, S.. ”Implicit Delivery Options and Optimal Delivery Strategies for Financial Futures Contracts.’ Journal of Financial Economics, 16 (05 1986), 41–72.CrossRefGoogle Scholar
Kane, A., and Marcus, A. J.. “An Assessment of Delivery Risk in the Treasury Bond Futures Market.” Working Paper No. 95, Columbia Futures Center (10 1984).Google Scholar
Kane, A., and Marcus, A. J.. ”The Quality Option in the Treasury Bond Futures Market: An Empirical Assessment.” Journal of Futures Markets, 6 (Summer 1986), 231–248.CrossRefGoogle Scholar
Kane, A., and Marcus, A. J.. “On the Delivery Option on Forward Contracts: A Note.” Journal of Financial and Quantitative Analysis, 23 (09 1988), 337–341.CrossRefGoogle Scholar
Kilcollin, T. E. “Difference Systems in Financial Futures.” Journal of Finance, 37 (12 1982), 1183–1197.CrossRefGoogle Scholar
Kolb, R. W.; Gay, G.; and Jordan, J. V.. “Are There Arbitrage Opportunities in the Treasury-Bond Futures Market?” Journal of Futures Markets, 2 (Summer 1982), 151–158.CrossRefGoogle Scholar
Livingston, M. “The Delivery Option on Forward Contracts.” Journal of Financial and Quantitative Analysis, 22 (03 1987), 79–87.CrossRefGoogle Scholar
Resnick, B. G., and Hennigar, E.. “The Relationship between Futures and Cash Prices for U.S. Treasury Bonds.” Review of Research in Futures Markets, 2 (1983), 283–312.Google Scholar