Estimating the Value of Delivery Options in Futures Contracts

Posted: 10 Oct 2004

See all articles by Jana Hranaiova

Jana Hranaiova

Public Company Oversight Board

Robert A. Jarrow

Cornell University - Samuel Curtis Johnson Graduate School of Management

William G. Tomek

Cornell University - School of Applied Economics and Management

Abstract

We analyze the effect various delivery options embedded in commodity futures contracts have on the futures price. The two embedded options considered are the timing and location options. We show that early delivery is always optimal when only a timing option is present, but not so with joint options. The estimates of the combined options are much smaller than the comparable estimates for the timing option alone. The average value of the joint option is about 5% of the average basis on the first day of the maturity month. This suggests that joint options can increase deliverable supplies while potentially having only a small effect on basis behavior.

Keywords: Commodity futures, delivery option

JEL Classification: G13, Q14

Suggested Citation

Hranaiova, Jana and Jarrow, Robert A. and Tomek, William G., Estimating the Value of Delivery Options in Futures Contracts. Available at SSRN: https://ssrn.com/abstract=600581

Jana Hranaiova (Contact Author)

Public Company Oversight Board ( email )

1666 Kase Street
Washington, DC 20006
United States

Robert A. Jarrow

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Department of Finance
Ithaca, NY 14853
United States
607-255-4729 (Phone)
607-254-4590 (Fax)

William G. Tomek

Cornell University - School of Applied Economics and Management ( email )

248 Warren Hall
Ithaca, NY 14853
United States

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