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Position limits for cash‐settled derivative contracts

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  • Hans R. Dutt
  • Lawrence E. Harris

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

Suggested Citation

  • Hans R. Dutt & Lawrence E. Harris, 2005. "Position limits for cash‐settled derivative contracts," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 25(10), pages 945-965, October.
    • Handle: RePEc:wly:jfutmk:v:25:y:2005:i:10:p:945-965
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    Cited by:

    1. Fantazzini, Dean, 2016. "The oil price crash in 2014/15: Was there a (negative) financial bubble?," Energy Policy, Elsevier, vol. 96(C), pages 383-396.
    2. Zhang, Anthony Lee, 2022. "Competition and manipulation in derivative contract markets," Journal of Financial Economics, Elsevier, vol. 144(2), pages 396-413.
    3. Wei, Lijian & Zhang, Wei & Xiong, Xiong & Shi, Lei, 2015. "Position limit for the CSI 300 stock index futures market," Economic Systems, Elsevier, vol. 39(3), pages 369-389.

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