Optimal innovation of futures contracts

This article presents a simple model of the innovation of newfutures contracts by transaction volume-maximizing futures exchangesin incomplete markets under uncertainty, with mean-variancepreferences and proportional transactions costs. We characterizethe set of Nash equilibria for a number of exchanges simultaneouslyor sequentially choosing contrasts. The optimal monopolisticcontract design is shown to be Pareto-optimal. An example showsthe failure of Pareto optimality for a particular Nash equilibrium.Likewise, in a monopolistic multiperiod setting, an exampleshows the failure of Pareto optimality given an incentive forthe exchange to induce turnover.