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

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  • Karagozoglu, Ahmet K

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. Copyright 1999 by MIT Press.

Suggested Citation

  • Karagozoglu, Ahmet K, 1999. "Explicit versus Implicit Contracts: The Case of DIFF and CROSS Futures," The Financial Review, Eastern Finance Association, vol. 34(1), pages 101-118, February.
    • Handle: RePEc:bla:finrev:v:34:y:1999:i:1:p:101-18
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