Spread Futures: Why Derivatives on Derivatives?
25 Pages Posted: 9 Apr 2002
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: Suggested Citation