The quality option implicit in futures contracts |
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Authors: | Gerald D Gay Steven Manaster |
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Institution: | Georgia State University, Atlanta, GA 30303, USA;University of Utah, Salt Lake City, UT 84112, USA |
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Abstract: | The quality option implicit in futures contracts allows the short position to satisfy the contract by delivering one of a variety of specified assets. If, at the time the contract is purchased, knowledge of which of the allowed assets will be cheapest at maturity is uncertain, then the quality option will have value. The greater the value of this option, the lower will be the futures price. This paper presents, and tests, a futures pricing model that incorporates the quality option aspect of commodity futures contracts. Our research shows that the quality option has a significant impact on futures prices. |
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