Interaction between Resource Extraction and Futures Markets: A Game-Theoretic Analysis
This paper is an attempt to model three salient features of futures markets for exhaustible resources: oligopolistic control of the market for the basic commodity, the purely speculative nature of most of futures trading and apparent availability of unlimited funds to the traders.
Interaction between the extraction policy of duopolists and their futures trading is modelled with the help of a two-stage noncooperative game with incomplete information. The second stage is a two-period extraction game, which shows how futures positions taken by the producers affect their planned extraction rates and the resulting spot price of the resource. The first stage is a noncooperative futures game in which equilibrium net positions of and subgame perfect contracts between two producers and a representative speculator are determined.
The purely speculative part of futures positions depends mainly on the (known) structure of inconsistent prior beliefs about the level of uncertain market demand for the basic commodity. The hedging part is related to (known) levels of stocks of the resource available to the individual producers, and to their degree of risk aversion. The conditions under which each player goes net short or net long are worked out in detail.
KeywordsRisk Aversion Future Market Future Contract Spot Price Short Position
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