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Optimal contract under asymmetric information: the role of options on futures

Author

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  • Andrea Beccarini

Abstract

The aim of this paper is to show that an option on an appropriate future may solve some market failures caused by asymmetric information. Some models related to the adverse selection, moral hazard and verification costs are analyzed and the performance of these options on futures is evaluated. The typical situation regards a consumer (or an investor) who wishes to discount his/her future income in order to finance his/her present consumption (investment); under asymmetric information this agent may incur in liquidity constraints (credit rationing), which is not the case when buying the option on a futures contract. This contract is constructed so that the (future) agent’s income is correlated with some futures contract (but this is private information) on which the option is issued. Some examples show that this is not a very stringent assumption.

Suggested Citation

  • Andrea Beccarini, 2011. "Optimal contract under asymmetric information: the role of options on futures," CQE Working Papers 1911, Center for Quantitative Economics (CQE), University of Muenster.
    • Handle: RePEc:cqe:wpaper:1911
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    File URL: https://www.wiwi.uni-muenster.de/cqe/sites/cqe/files/CQE_Paper/CQE_WP_18_2011.pdf
    File Function: Version of February, 2011
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    More about this item

    Keywords

    Asymmetric information; credit rationing; options on futures;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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