The Nature of Futures Contracts

Trading or Investment Vehicles

The nature of futures contracts is such that they exist during a specified, finite period of time after which they are settled either in cash or through a delivery process. By contrast, many albeit certainly not all, spot instruments that serve as the underlying basis for futures contracts may be perpetual in nature.

While futures serve many of the same economic purposes as underlying spot instruments, we pose the question – does the finite term of a futures contract impact the way in which these products are utilized? In order to gain some insight into this question, we study the average holding period (AHP) of futures relative to the AHP associated with comparable spot or over-the-counter (OTC) instruments.

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