The Proposed Introduction of Futures-Style Margining in the United States: An Australian Comparison

We extend the quadratic approximation method to examine American-style options traded using futures-style margining and show that an early exercise premium can exist when the cost of carry is negative. Empirical results based on a reduced form of the model using futures-style call options traded on the Australian All Ordinaries Share Price Index are consistent with previous research: call option early exercise premiums are economically zero. Full option prices are examined by comparing observed futures-style with theoretical stock-style values. We find futures-style values exceed stock-style values and argue that the increase results from improvements in liquidity. The findings are particularly relevant given the pending decision at the Commodity Futures Trading Commission to introduce a futures-style system in the United States.