Publication: On the future contract quality option: a new look
Identifiers
Publication date
2010-07
Defense date
Authors
Advisors
Tutors
Journal Title
Journal ISSN
Volume Title
Publisher
Routledge
Abstract
This article provides a new method for replicating and pricing the quality
options usually embedded in many future contracts. The replicating
strategies may draw on both the future contract as well as its related calls
and puts. They also yield the quality option theoretical price in perfect
markets, as well as upper and lower bounds for its bid or ask prices if
frictions are incorporated. With respect to previous literature, this new
approach seems to reflect five contributions: First, the analysis does not
depend on any dynamic assumption concerning the Term Structure of
Interest Rates (TSIR) behaviour; second, it incorporates the information
contained in calls and puts on the future contract; third, it allows us to use
real market perfectly synchronized prices; fourth, transaction costs can be
considered and, finally, this article shows that the quality option may be a
useful security in the portfolio of many traders. These traders will make the
future contract more effective as a hedging instrument. This article also
presents an empirical test involving the German market.
Description
Keywords
Term structure of interest rates, Quality, Prices
Bibliographic citation
Applied Financial Economics, 2010, v. 20, nº 15, pp. 1217-1229