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The Quality Option and Timing Option in Futures Contracts
Author(s) -
BOYLE PHELIM P.
Publication year - 1989
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.1540-6261.1989.tb02406.x
Subject(s) - futures contract , deliverable , quality (philosophy) , asian option , position (finance) , asset (computer security) , set (abstract data type) , valuation of options , actuarial science , put option , value (mathematics) , exotic option , option value , economics , computer science , finance , microeconomics , philosophy , computer security , management , epistemology , machine learning , incentive , programming language
Often futures contracts contain quality options whereby the short position has the choice of delivering one of an acceptable set of assets. We explore the implications of the quality option on the futures price. We develop a method for pricing the quality option for the general case of n deliverable assets and provide numerical illustrations of its significance. Even when the asset prices are very highly correlated, this option can have nontrivial value, especially when there is a large number of deliverable assets. We analyze the impact of the timing option and its interaction with the quality option. A procedure is developed for valuing the timing option in the presence of the quality option, and some numerical estimates are obtained.