Cornering is an illegal practice, whereby speculators accumulate a significant amount of the underlying asset. When maturity
Question:
Cornering is an illegal practice, whereby speculators accumulate a significant amount of the underlying asset. When maturity is approached, the short positions will be forced to buy the asset at large prices to honor their contracts, if the supply is limited. To circumvent this difficulty, contracts should be arranged only for underlying assets with a sufficiently deep market, or alternatively a range of underlying assets may be eligible for delivery, rather than a single one. For instance, in futures contracts on bonds, a whole range of bonds may be delivered, not only a specific one. Clear rules define the equivalence among similar, but not identical, bonds and the coefficients by which the delivery price is modified if necessary. For instance, bonds with comparable maturities, but different coupon rates may be included in the range for acceptable delivery.
Step by Step Answer:
An Introduction To Financial Markets A Quantitative Approach
ISBN: 9781118014776
1st Edition
Authors: Paolo Brandimarte