Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
961166 | Journal of Financial Intermediation | 2006 | 28 Pages |
Abstract
Recently, calendar spread futures, futures contracts whose underlying asset is the difference of two futures contracts with different delivery dates, have been successfully introduced for a number of financial futures contracts traded on the Chicago Board of Trade. A spread futures contract is not an obvious financial innovation, as it is a derivative on a derivative security: a spread futures position can be replicated by taking positions in the two underlying futures contracts, both of which may already be quite liquid. This paper provides a motivation for this innovation, demonstrating how the introduction of spread futures can, by changing the relative trading patterns of hedgers and informed traders, affect equilibrium bid-ask spreads, improve hedger welfare, and potentially improve market-maker expected profits. These results are robust both to allowing serial correlation of asset price changes, and investor preference for skewness.
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Authors
Charles J. Cuny,