Cash Settlement and Futures Price Volatility: Evidence from Options Data
Forthcoming in Advances in Quantitative Analysis of Finance & Accounting
Posted: 1 Aug 2002
The Chicago Mercantile Exchange (CME) abandoned the live hog futures contract (physical delivery) in December 1996 and replaced it with the lean hog futures contract (cash settlement), with the intention of improving the effectiveness of the contract as a risk management tool. This paper applies implied volatility derived from options on live/lean hog futures contracts to examine the possible effects of cash settlement on futures price volatility. Using different data windows and applying different model specifications, it is found that the hog futures price has become less volatile, thus improving the risk management function of the futures contract, since the adoption of cash settlement.
Note: This is a description of the paper and not the actual abstract.
Keywords: Cash Settlement, Implied Volatility, Live/Lean Hog Futures Options, GARCH Models
JEL Classification: G1, Q1, C1
Suggested Citation: Suggested Citation