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 favor short or long manipulations. Copyright 2001 by University of Chicago Press.

https://www.jstor.org/stable/10.1086/209671

The economics of futures and options contracts based on cash settlement

Manipulation of Cash‐Settled Futures Contracts

Cash settlement of derivative contracts makes them susceptible to manipulation by traders who expect to close large positions upon final settlement. Cash settlement also increases underlying volatility when hedgers unwind their hedges if they have no incentives to control their trading costs. Limits on the positions that traders can carry into final settlement can be used to mitigate associated economic inefficiencies when surveillance is insufficient. This article develops a model that regulators can use to set these limits that is based upon microstructure theory. The empirical findings indicate that existing position limits are largely inconsistent with those suggested by the model. © 2005 Wiley Periodicals, Inc. Jrl Fut Mark 25:945–965, 2005

The economics of futures and options contracts based on cash settlement

Citations

Manipulation of Cash‐Settled Futures Contracts

Position limits for cash‐settled derivative contracts

Cash settlement issues for live cattle futures contracts

Physical Delivery versus Cash Settlement: An Empirical Study on the Feeder Cattle Contract*

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