On the future contract quality option: a new look

Alejandro Balbas and Susana Reichardt

Applied Financial Economics, 2010, vol. 20, issue 15, 1217-1229

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.

Date: 2010
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://www.tandfonline.com/doi/abs/10.1080/09603107.2010.482515 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:apfiec:v:20:y:2010:i:15:p:1217-1229

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/RAFE20

DOI: 10.1080/09603107.2010.482515

Access Statistics for this article

Applied Financial Economics is currently edited by Anita Phillips

More articles in Applied Financial Economics from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().