Short Cap Futures
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The article describes the specifications for a new contract to be voted on in Fall 2008. For details about the contest, see the contest's info page.
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First Author: John J. Lothian
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Summary of Contract
Short cap futures, or "shorties" for short, are futures contracts that have a price limit or cap on the total risk of the contract. Short shorties positions would have limited risk, as do long shorties positions. This limitation on the total amount or risk for the contract allows for short-only funds to trade various contracts with the same risk limits that long-only funds currently enjoy. This would help increase the amount of short participation in the markets.
Shorties could be created for any commodity contract. For example, a short cap corn contract could have the same size, daily price limits, tick value and delivery points as a standard futures contract. But, a short cap contract in corn would have a downside limit of zero (maybe higher, a historic low?) and an upside limit of say $12. Thus, with prices of corn near $6, short cap futures would be set with an upside and downside limit that allows both shorts and long to enjoy limited risk and the other contract structures of traditional futures contracts (open trade equity, marked to the market, good faith margins).
From a public good standpoint, increasing short participation of futures could help offset some of the increased interest in the long side of futures. A tax policy that favored shorties could help this market develop and could help buffer some of the speculative excess currently flowing into the long-only funds.