The Theory of Hedging and Speculation in Commodity Futures
Although significant contributions have appeared in the literature in recent years, the present day theory of hedging and speculation appears to account inadequately for certain market practices. In particular, the motivation of the trader who undertakes hedging activities, the role that hedging plays in his over-all market operations, and the distinction between a trader who hedges and one who speculates have given rise to difficulties in the literature. My purposes here are (1) to outline briefly the purposes and mechanics of a commodity futures market, (2) to discuss and appraise the theory of hedging and speculation as it exists today, (3) to present a reformulated concept of hedging, and (4) to construct a model that may both assist in clarifying the concepts of hedging and speculation and contribute to a better understanding of certain market phenomena.
KeywordsPrice Change Future Market Future Price Future Contract Spot Price
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