The Delivery Option on Forward Contracts: A Comment

Theodore M. Barnhill

Journal of Financial and Quantitative Analysis, 1988, vol. 23, issue 3, 343-349

Abstract: Livingston contends that short futures/long cash traders can eliminate the potential costs of the quality option through use of a dynamic trading strategy. It is proposed here that if this is possible then futures prices will never reach a stable equilibrium. Alternatively, if Livingston's argument is flawed, then no risk-free arbitrage opportunities are likely to be available to either short cash/long futures or long cash/short futures traders. Under such conditions, futures prices will reach an equilibrium when the expected return and risk of each type position are equally attractive.

Date: 1988
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