Explicit Versus Implicit Contracts: The Case of Diff and Cross Futures
Posted: 22 Dec 1998
Abstract
This paper investigates the potential success of an explicit futures contract when an implicit one, which can duplicate it, exists. It is hypothesized that the success of the explicit futures contract depends on its value-added being greater than that of its implicit counterpart given that sufficient hedging demand exists for it. Following a discussion of value-added analysis, hedging effectiveness of the Euro-rate Differential (DIFF), the Currency Cross-rate (CROSS) futures contracts, and their implicit counterparts are calculated and tests of relative hedging effectiveness of these contracts are performed. Test results support the hypothesis of the paper and their implications for new futures contract development are discussed.
JEL Classification: G13, G15
Suggested Citation: Suggested Citation