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Cash settlement as an alternative settlement mechanism for the live hog futures contract

✍ Scribed by Kevin L. Kimle; Marvin L. Hayenga

Publisher: John Wiley and Sons
Year: 1994
Tongue: English
Weight: 818 KB
Volume: 14
Category: Article
ISSN: 0270-7314
DOI: 10.1002/fut.3990140307

No coin nor oath required. For personal study only.

✦ Synopsis

The use of cash settlement as a method of settling futures contracts is a relatively new concept [ Rowsell and Purcell ( 1990)]. Historically, futures contracts were for commodities, and actual delivery was the most logical means of linking the futures contract with its underlying commodity. With the development of financial futures, however, alternative means of settlement began to emerge.

Cash settlement was first used for Eurodollar and stock futures contracts in 198 1. Soon thereafter proposals involving cash settlement as an alternative to physical delivery began to emerge for agricultural futures markets. Currently the Chicago Mercantile Exchange (CME) live hog futures contract uses a physical delivery settlement. It allows delivery of 40,000 pounds of hogs meeting various weight and grade specifications at any one of seven (previously eight) alternative terminal markets as a means of settlement.

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