The Delivery Option on Forward Contracts

Miles Livingston

Journal of Financial and Quantitative Analysis, 1987, vol. 22, issue 1, 79-87

Abstract: Many futures contracts contain a delivery option, which allows the short position a choice to deliver one of several varieties of a commodity. Several authors have argued that delivery options can have considerable value. For a forward contract with a delivery option, this paper shows that a continuously adjusted hedge will drive the value of the delivery option towards zero, assuming perfect and frictionless markets.

Date: 1987
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