Absent seasonality, the convenience yield, timing options, or quality issues, the basis in a pure cost-of-carry market represents any storage fees plus the opportunity cost of capital.
One example of a pure cost-of-carry market is single stock futures which has both quarterly and serial contracts listed in the United States.
In this section, we consider whether there are additional net benefits to investors from listing serial month contracts in a pure cost-of-carry market.
In a pure cost-of-carry market, however, seasonality, convenience yield factors, and quality or timing issues are not relevant for the pricing of futures contracts.
For hedgers, a second implication of a pure cost-of-carry market is that it is possible to construct a portfolio of the futures and underlying asset that has zero variance over the hedge horizon.
In a pure cost-of-carry market, however, no such differences exist.
Similar to hedging, a pure cost-of-carry market implies that the return to an arbitrageur's strategy is independent of the futures' expiration month that is selected.
In our analysis, we demonstrate that in a pure cost-of-carry market, hedgers are indifferent to a contract's expiration month.
While single stock futures represent a pure cost-of-carry market, one possible benefit of listing serial month expiration dates is to promote arbitrage activity between futures and option contracts.
Ultimately the net benefit of trading both serial and quarterly expiration month contracts in a pure cost-of-carry market is an empirical issue.
Here we formally show that hedging effectiveness is independent of the futures contract expiration date in a pure cost-of-carry market. To begin, consider the hedger at time t who wishes to minimize the variance of a portfolio consisting of a predetermined cash market position, [S.sub.1], and a position in [h.sub.1] futures contracts that expire at time T.
Equation (8) implies that in a pure cost-of-carry market the effectiveness of the optimal hedging strategy is invariant to the futures contract maturity.