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Average Price Futures Contracts: Pricing, Characteristics, and Implications
Author(s) -
Yoo Jin
Publication year - 2015
Publication title -
asia‐pacific journal of financial studies
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.375
H-Index - 15
eISSN - 2041-6156
pISSN - 2041-9945
DOI - 10.1111/ajfs.12115
Subject(s) - futures contract , speculation , financial economics , currency , forward market , economics , complement (music) , index (typography) , forward contract , normal backwardation , monetary economics , finance , computer science , biochemistry , chemistry , complementation , world wide web , gene , phenotype
We define and price average index and currency futures, show how they reduce price manipulation, explore their features as financial instruments, and discuss their policy implications. They offer investors protection against price manipulation, effective hedging, and even rational speculation. The study shows that the mean and variance of the price of an arithmetic average futures contract are functions of its reference dates and that it can be flexibly designed to meet diverse hedging needs of investors. With these features, average price futures contracts can serve as a good complement to existing plain vanilla futures.