On the future contract quality option: a new look

Susana Reichardt

DEE - Working Papers. Business Economics. WB from Universidad Carlos III de Madrid. Departamento de Economía de la Empresa

Abstract: The paper provide a new method to replicate and price the quality options usually embedded in many future contracts. The replicating strategies may draw on both the future contract and 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 four contributions: Firstly, the analysis does not depend on any dynamic assumption concerning the TSIR behaviour, secondly, it incorporates the information contained in calls and puts whose underlying security is the future contract, thirdly, it allows us to use real market perfectly synchronized prices, and fourthly, transaction costs can be considered. The paper presents an empirical test involving the German market that reveals some differences with regard to previous studies.

Date: 2006-11
New Economics Papers: this item is included in nep-fmk
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Persistent link: https://EconPapers.repec.org/RePEc:cte:wbrepe:wb063711

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