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The Delivery Option on Forward Contracts

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  • Livingston, Miles

Abstract

Many futures contracts contain a delivery option, which allows the short position a choice to deliver one of several varieties of a commodity. Several authors have argued that delivery options can have considerable value. For a forward contract with a delivery option, this paper shows that a continuously adjusted hedge will drive the value of the delivery option towards zero, assuming perfect and frictionless markets.

Suggested Citation

  • Livingston, Miles, 1987. "The Delivery Option on Forward Contracts," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 22(1), pages 79-87, March.
    • Handle: RePEc:cup:jfinqa:v:22:y:1987:i:01:p:79-87_01
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    Cited by:

    1. Peter Ritchken & L. Sankarasubramanian, 1995. "A Multifactor Model Of The Quality Option In Treasury Futures Contracts," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 18(3), pages 261-279, September.
    2. Ren-Raw Chen & Shih-Kuo Yeh, 2012. "Analytical bounds for Treasury bond futures prices," Review of Quantitative Finance and Accounting, Springer, vol. 39(2), pages 209-239, August.
    3. João Pedro Vidal Nunes & Luís Alberto Ferreira De Oliveira, 2007. "Multifactor and analytical valuation of treasury bond futures with an embedded quality option," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 27(3), pages 275-303, March.

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