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Difference Systems in Financial Futures Markets
Author(s) -
KILCOLLIN THOMAS ERIC
Publication year - 1982
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1982.tb03611.x
Subject(s) - futures contract , deliverable , cash , forward market , economics , futures market , financial economics , spread trade , yield (engineering) , financial market , derivatives market , business , finance , corporate governance , open end fund , materials science , management , institutional investor , metallurgy
ABSTRACT Many financial futures markets allow substitutions for the par grade of security at delivery. Substitutes are deliverable at premiums or discounts—“differences” in commodities parlance—to the futures price. The rule that establishes these differences is called a difference system. This paper characterizes financial futures market equilibrium with yield‐based difference systems and investigates particular systems in use. The major finding is that currently used difference systems effectively limit deliverable supply in the futures markets and lead to futures prices which understate the cash market price of the par security.