Research Article

Position limits for cash-settled derivative contracts

  1. Hans R. Dutt1,*,
  2. Lawrence E. Harris2

Article first published online: 18 AUG 2005

DOI: 10.1002/fut.20179

Issue

Journal of Futures Markets

Journal of Futures Markets

Volume 25, Issue 10, pages 945–965, October 2005

Additional Information

How to Cite

Dutt, H. R. and Harris, L. E. (2005), Position limits for cash-settled derivative contracts. J. Fut. Mark., 25: 945–965. doi: 10.1002/fut.20179

Author Information

  1. 1

    U.S. Securities and Exchange Commission (SEC), Washington, D.C.

  2. 2

    University of Southern California, Los Angeles

*Office of Economic Analysis, No. 6010, Securities and Exchange Commission, 901 E Street NW, Washington, D.C. 20549

Publication History

  1. Issue published online: 18 AUG 2005
  2. Article first published online: 18 AUG 2005
  3. Manuscript Accepted: DEC 2004
  4. Manuscript Received: SEP 2004

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Abstract

Cash settlement of derivative contracts makes them susceptible to manipulation by traders who expect to close large positions upon final settlement. Cash settlement also increases underlying volatility when hedgers unwind their hedges if they have no incentives to control their trading costs. Limits on the positions that traders can carry into final settlement can be used to mitigate associated economic inefficiencies when surveillance is insufficient. This article develops a model that regulators can use to set these limits that is based upon microstructure theory. The empirical findings indicate that existing position limits are largely inconsistent with those suggested by the model. © 2005 Wiley Periodicals, Inc. Jrl Fut Mark 25:945–965, 2005

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