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The Delivery Option on Forward Contracts: A Comment

Published online by Cambridge University Press:  06 April 2009

Theodore M. Barnhill
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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.

Information

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 23 , Issue 3 , September 1988, pp. 343 - 349
Copyright
Copyright © School of Business Administration, University of Washington 1988

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