ESTIMATING THE VALUE OF DELIVERY OPTIONS IN FUTURES CONTRACTS

We analyze the effect various delivery options embedded in commodity futures contracts have on the futures price. The two embedded options considered are the timing and location options. We show that early delivery is always optimal when only a timing option is present, but not so when joint options are present. The estimates of the combined options are much smaller than the comparable estimates for the timing option alone. The average value of the joint option is about 5% of the average basis on the first day of the maturity month. This suggests that joint options can increase deliverable supplies while potentially having only a small effect on basis behavior.