publication . Article . 2001

Manipulation of Cash-Settled Futures Contracts

Craig Pirrong;
Open Access
  • Published: 01 Jan 2001 Journal: The Journal of Business, volume 74, pages 221-244 (issn: 0021-9398, eissn: 1537-5374, Copyright policy)
  • Publisher: University of Chicago Press
Abstract
Replacement of delivery settlement of futures contracts with cash settlement is frequently proposed to reduce the frequency of market manipulation. This article shows that it is always possible to design a delivery-settled futures contract that is less susceptible to cornering by a large long than any given cash-settled contract. Such a contract is more susceptible to manipulation by large shorts, however. Therefore, cash settlement does not uniformly dominate delivery settlement as a means of reducing the frequency of market power manipulations in derivatives markets. The efficient choice of settlement mechanism depends on whether supply and demand conditions f...
Subjects
free text keywords: Supply and demand, Market power, Futures contract, Market manipulation, Microeconomics, Monetary economics, Economics, Cash, media_common.quotation_subject, media_common, Derivatives market, Forward market, Spot contract
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