Cash settlement for futures contracts based on common stock indices: An economic and legal perspective
✍ Scribed by Terrence F. Martell; Jerrold E. Salzman
- Publisher
- John Wiley and Sons
- Year
- 1981
- Tongue
- English
- Weight
- 763 KB
- Volume
- 1
- Category
- Article
- ISSN
- 0270-7314
No coin nor oath required. For personal study only.
✦ Synopsis
urrently pending before the Commodity Futures Trading Commission are C proposals from several exchanges for contract designation to trade equity futures contracts. Several of these proposals, including those submitted by the CME, COMEX, and NYFE, are based on a diversified common stock index.
Equity futures contracts will allow investors to hedge market risk-the single biggest cause of variability in portfolio return. In addition, a forceful case can be made that these contracts would improve capital formation by reducing the issue expense of new stock. Moreover, equity futures contracts will provide a dimension of price discovery currently not available to the marketplace.
Despite their many obvious benefits, futures contracts based on a diversified equity index have been the subject of debate. A major part of the controversy focuses on the cash settlement rather than physical delivery in satisfaction of these contracts. This article explores the economic and legal issues raised by cash settlement of equity futures contracts, and whether cash settlement is economically efficient and legally allowable.