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On The Timing Option In A Futures Contract

Author

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  • Francesca Biagini
  • Tomas Björk

Abstract

The timing option embedded in a futures contract allows the short position to decide when to deliver the underlying asset during the last month of the contract period. In this paper we derive, within a very general incomplete market framework, an explicit model independent formula for the futures price process in the presence of a timing option. We also provide a characterization of the optimal delivery strategy, and we analyze some concrete examples.

Suggested Citation

  • Francesca Biagini & Tomas Björk, 2007. "On The Timing Option In A Futures Contract," Mathematical Finance, Wiley Blackwell, vol. 17(2), pages 267-283, April.
    • Handle: RePEc:bla:mathfi:v:17:y:2007:i:2:p:267-283
    DOI: 10.1111/j.1467-9965.2006.00303.x
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    References listed on IDEAS

    as
    1. Gay, Gerald D. & Manaster, Steven, 1986. "Implicit delivery options and optimal delivery strategies for financial futures contracts," Journal of Financial Economics, Elsevier, vol. 16(1), pages 41-72, May.
    2. Hugh Cohen, 1995. "Isolating The Wild Card Option," Mathematical Finance, Wiley Blackwell, vol. 5(2), pages 155-165, April.
    3. Gay, Gerald D. & Manaster, Steven, 1984. "The quality option implicit in futures contracts," Journal of Financial Economics, Elsevier, vol. 13(3), pages 353-370, September.
    4. repec:bla:jfinan:v:44:y:1989:i:1:p:101-13 is not listed on IDEAS
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    Cited by:

    1. Guo, Kevin & Leung, Tim, 2017. "Understanding the non-convergence of agricultural futures via stochastic storage costs and timing options," Journal of Commodity Markets, Elsevier, vol. 6(C), pages 32-49.
    2. Michèle Breton & Ramzi Ben‐Abdallah, 2018. "Time is money: An empirical investigation of delivery behavior in the U.S. T‐Bond futures market," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 38(1), pages 22-37, January.
    3. Kristoffer Lindensjö, 2016. "The End of the Month Option and Other Embedded Options in Futures Contracts," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 23(1), pages 69-83, March.
    4. Raquel M. Gaspar & Mariana Khapko, 2023. "In memoriam: Tomas Björk (1947–2021)," Finance and Stochastics, Springer, vol. 27(4), pages 867-885, October.

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    More about this item

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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