Estimating the Value of Delivery Options in Futures Contracts

We analyze the effect various delivery options embedded in commodity futures contracts have on the futures price. The two embedded options considered are the timing and location options. We show that early delivery is always optimal when only a timing option is present, but not so with joint options. The estimates of the combined options are much smaller than the comparable estimates for the timing option alone. The average value of the joint option is about 5% of the average basis on the first day of the maturity month. This suggests that joint options can increase deliverable supplies while potentially having only a small effect on basis behavior. JEL Classifications: G13, Q14 _________________________________ We gratefully acknowledge the support for this research provided by the Chicago Board of Trade Educational Research Foundation and by the Mellon foundation. The views expressed in this paper are those of the authors and do not, in any way, reflect the views or opinions of the U.S. CFTC.