The success and failure of futures contracts
Balnaves, Peter M.
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The determinants of the success and failure of futures contracts were investigated. The existing literature on the subject was examined yielding two predominant veins of thought; those attributing the determinants of success to the characteristics of the underlying commodity and those favoring the contractual provisions. The two views were compared and contrasted based upon their respective explanatory merits. Both were found to contain explanatory value but failed to offer an all encompassing theoretic approach. Fifty innovative contracts were examined to categorize the inception behavior of new contracts. The contracts were found to be either very successful, fail miserably, or experience a period of initial success before abrupt cessation of trading. The reasons for each respective category of behavior were examined and highlighted with case studies. Those directly tailorable factors contributing to the potential success of a contract were examined in the context of an exchanges' strategy for innovation. The difficulties of using duplicative contracts to capture interest from existing liquid instruments is highlighted. After developing this solid understanding of contract innovation the existing application of the insurance hypothesis is refuted and an alternate expected money value approach stated. The advantages of this approach and the increased explanatory power are espoused.
- Masters Theses