Hedger Response to Multiple Grades of Delivery on Future Markets

Abstract

Futures markets are essentially hedging markets. A successful futures market, therefore, mist provide effective instruments for hedgers. Accordingly. contract specifications and regulatory policies are the two most important elements when evaluating the effectiveness of a futures contract. However, due to shifts in the underlying structure of production and trade, contract grades and locations may become less representative of commercial needs, and hence an initially successful futures market may be subject to failure. To solve this problem, new regulatory policies may be proposed; but, the most constructive approach is to adapt the contract specifications to the changing market situation. Such contract specifications include the list of deliverable grades and locations, techniques for financial settlement when non-par deliveries are made, and regulated terms.