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Commodity Futures and Spot Price Determination and Hedging in Capital Market Equilibrium

Published online by Cambridge University Press:  06 April 2009

Hans R. Stoll
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Extract

Hedgers are an integral element of most models of futures markets. They are typically viewed as involved in the storage or production process and attempting by futures market transactions to avoid price risk associated with holdings of the underlying commodity. Speculators accept the risk and receive compensation whose size is in considerable dispute. (Keynes [16], Telser [24], Cootner [6], Dusak [8]). This “insurance” view of hedging is sometimes expanded to allow for “discretionary” or “selective” hedging which tends to arise when expectations differ across individuals. Narrow models of hedging in the commodities market (Johnson [14], Heifner [11], Peck [19]), in the foreign exchange market (Ethier [9]), and in the bank loan market (Pyle [20]) as well as more general models of the determination of spot and futures prices that incorporate hedging (Stein [22]) have preceded or ignored the theory of equilibrium asset prices (Sharpe [21], Lintner [17]). On the other hand, recent models of the valuation of futures contrasts in capital market equilibrium have not considered the role of hedgers (Grauer and Litzenberger [10]).

Type
V. Financial Innovation: Securities and Markets
Information
Journal of Financial and Quantitative Analysis , Volume 14 , Issue 4 , November 1979 , pp. 873 - 894
Copyright
Copyright © School of Business Administration, University of Washington 1979

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References

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