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- Title
On the exit value of a forward contract.
- Authors
Power, Gabriel J.; Turvey, Calum G.
- Abstract
Default risk associated with forward contracts can be substantial, yet these financial instruments are widely used to hedge price risk. An objectively priced exit option on the forward contract would help reduce the likelihood of litigation associated with contract default. A method is proposed to compute the exit option's value for an arbitrary forward contract, using Black's (1976) model and option premium data. The time series dynamics of the exit option value are confirmed to be, like its underlying, well described by a martingale with heavy-tailed (Student) GARCH residuals. © 2008 Wiley Periodicals, Inc. Jrl Fut Mark 29: 179–196, 2009
- Subjects
DEFAULT (Finance); COMMODITY exchanges; CONTRACTS; FINANCIAL instruments; ARBITRARY constants; FINANCIAL futures; GROSS income; MARGIN accounts; ECONOMIC demand
- Publication
Journal of Futures Markets, 2009, Vol 29, Issue 2, p179
- ISSN
0270-7314
- Publication type
Article
- DOI
10.1002/fut.20350