Average Price Futures Contracts: Pricing, Characteristics, and Implications

Abstract

We define and price average index and currency futures, show how they reduce price manipulation, explore their features as financial instruments, and discuss their policy implications. They offer investors protection against price manipulation, effective hedging, and even rational speculation. The study shows that the mean and variance of the price of an arithmetic average futures contract are functions of its reference dates and that it can be flexibly designed to meet diverse hedging needs of investors. With these features, average price futures contracts can serve as a good complement to existing plain vanilla futures.