Explicit versus Implicit Contracts: The Case of DIFF and CROSS Futures

  1. Ahmet K. Karagozoglu*

Article first published online: 9 MAR 2005

DOI: 10.1111/j.1540-6288.1999.tb00447.x

Issue

Financial Review

Financial Review

Volume 34, Issue 1, pages 101–118, February 1999

Additional Information

How to Cite

Karagozoglu, A. K. (1999), Explicit versus Implicit Contracts: The Case of DIFF and CROSS Futures. Financial Review, 34: 101–118. doi: 10.1111/j.1540-6288.1999.tb00447.x

Author Information

  1. The City University of New York

* * Corresponding author: Department of Economics and Finance, Zicklin School of Business, Baruch College, The City University of New York, 17 Lexington Ave. Box E-621, New York, NY 10010; Phone: (212) 802-6391, Fax: (212) 802-6353, E-mail: ahmet_karagozoglu@baruch.cuny.edu

  1. The author wishes to thank Linda Allen, Terrence Martell, Joel Rentzler, and especially Ashok Vora for helpful comments, as well as the anonymous referees, the participants at the 1996 Conference and Annual Meeting of the International Association of Financial Engineers, at the 1997 Annual Meeting of the Eastern Finance Association, and at the 1998 Annual Meeting of the Midwest Finance Association. Any remaining errors belong to the author.

Publication History

  1. Issue published online: 9 MAR 2005
  2. Article first published online: 9 MAR 2005

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Keywords:

  • hedging effectiveness;
  • explicit contracts;
  • implicit contracts;
  • synthetic futures contracts;
  • value-added analysis
  • G13

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.

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