Speculation and Hedging Using Options on Futures Contracts

Abstract

Last year, a number of options contracts were initiated in several exchanges, and several other have been started in 1983. Trading began in the fourth quarter of 1982 for options to purchase Treasury bond futures, options for gold futures, and options for spot purchases of five major currencies. Options on stock index futures were intitiated early this year. The rapid expansion of options contracts is probably related to the increased volatility (variance) of interest rates, exchange rates, stock prices, etc., as well as to the enlarged opportunity set for hedging and speculation. Some of the new option contracts may become moribund due to thinness of the market, although any prognosis at this time may be premature. As will be explained further below, the existing options on futures (gold, Treasury bonds) are only a subset of possible options on futures contracts, since the expiraction date of available options always bear a fixed relationhsip to the delivery date of the futures contract. However, all other possible futures options prices would be determined by arbitrage possibilities.