Spread Futures: Why Derivatives on Derivatives?

25 Pages Posted: 9 Apr 2002

See all articles by Charles J. Cuny

Charles J. Cuny

affiliation not provided to SSRN

Abstract

Recently, spread futures, a futures contract whose underlying asset is the difference of two futures contracts with different delivery dates, have been successfully introduced for four different financial futures contracts traded on the Chicago Board of Trade. A spread futures contract is a derivative on a derivative: 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 examines how the introduction of spread futures can nevertheless change the welfare and the trading patterns of hedgers, and improve aggregate hedger welfare.

JEL Classification: G19

Suggested Citation

Cuny, Charles John, Spread Futures: Why Derivatives on Derivatives?. Available at SSRN: https://ssrn.com/abstract=302928 or http://dx.doi.org/10.2139/ssrn.302928

Charles John Cuny (Contact Author)

affiliation not provided to SSRN

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