Delivery Systems Versus Cash Settlement in Corn and Soybean Futures Contracts
OFOR Working Paper No 95-02
Posted: 26 Aug 1999
Date Written: February 1995
The economic function of a futures market is performed efficiently only when a high level of competition exists among the participants. The prevention of distortions such as "squeezes" or "corners" has been an area of major concern for futures institutions. At the heart of such distortions lies the type of settlement system associated with the futures contract. The general objective of the paper is to analyze the present delivery system in the Chicago Board of Trade corn and soybean contracts, alternative physical delivery systems, and cash settlement systems. A theoretical model of futures pricing with delivery option is sued to simulate futures prices with different terms of construct cash indices. The results indicate that hedging effectiveness, when measured individually at non-delivery location, responds to changes in delivery differentials as well as delivery locations. However, as results are aggregated over space, the changes in settlement specifications tend to affect hedging performance only marginally. Results also suggest that cash settlement provides only slightly higher levels of hedging effectiveness than any type of multiple physical delivery.
JEL Classification: G13, Q13
Suggested Citation: Suggested Citation