Futures Markets, Hedging and Speculation
Futures markets provide partial income risk insurance to producers whose output is risky, but very effective insurance to commodity stockholders at remarkably low cost. Speculators absorb some of the risk but hedging appears to drive most commodity markets. The equilibrium futures price can be either below or above the (rationally) expected future price (backwardation or contango). The various effects futures markets can have on market and income stability are discussed. Rollover hedges can extend insurance from short-horizon contracts over longer periods.
KeywordsArbitrage Backwardation Capital asset pricing model Cobweb models Commodity stabilization scheme Contango Electricity markets Expectations Forward contracts Futures markets Futures markets, hedging and speculation Hedging Income stability Information aggregation Information sharing Liquidity Portfolio choice Price discovery Price stability Rational expectations Risk aversion Risk premium Risk sharing Rollover hedges Speculation Subjective probability Vertical integration Working, H.
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