An equilibrium model of speculation and hedging

  • 86 Pages
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by
Statementby Albert Sidney Kyle.
Classifications
LC ClassificationsMicrofilm 82/381 (H)
The Physical Object
FormatMicroform
Paginationiii, 86 leaves.
ID Numbers
Open LibraryOL3075176M
LC Control Number82174485

We propose a micro-founded equilibrium model to examine the interactions between the physical and the derivative markets of a commodity. This model provides a unifying framework for the hedging.

Details An equilibrium model of speculation and hedging FB2

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.

HEDGING PRESSURE AND FUTURES PRICE MOVEMENTS IN A GENERAL EQUILIBRIUM MODEL BY DAVID HIRSHLEIFER Optimal futures hedging and equilibrium futures price bias are examined in a model characterized by two consumption goods, one of which has stochastically varying output, and where information arrives sequentially.

This model provides a unifying framework for the hedging pressure and storage theories. The model shows a variety of behaviors at equilibrium that can be used to analyze price relations for any Author: David M.

Newbery. An equilibrium model for spot and forward prices of commoditiesI Michail Anthropelosa,1, Michael Kupperb,2, Antonis Papapantoleonc,3 ABSTRACT We consider a market model that consists of financial investors and producers of a commodity.

Producers optionally store some produc-tion for future sale and go short on forward contracts to hedge the. Abstract. We propose a micro-founded equilibrium model to examine the interactions between the physical and the derivative markets of a commodity.

This model provides a unifying framework for the hedging pressure and storage theories. The model shows a variety of behaviors at equilibrium that can be used to analyze price relations for any commodity. This paper explains corporate hedging and speculation in a two period rational expectations model.

A risk averse manager represents a firm that is priced in a risk neutral market. The manager enters into a cash flow hedge of a forecast transaction by taking a. In a recent paper, Dow and Gorton () present a general equilibrium model with overlapping generations, in which liquidity-motivated trade is modeled by assuming that “young” agents invest for future consumption and “old” agents liquidate their portfolios, while some “middle-aged” agents become privately informed.

2 In a more dynamic model, inventories may be drawn down in the presence of speculation on net, if shocks to the market would have led to increases in inventories in the absence of speculation. Pirrong () and Kilian and An equilibrium model of speculation and hedging book () make this point.

Kilian () uses a VAR model to distinguish between demand- and supply-side. Size and Book to Market as drivers 10 The Multi-Period Equilibrium Model Dynamic Hedging DemandINCOMPLETE Intertemporal CAPM Chapter 1 4The classic examples of this approach are the Walrasian general equilibrium model discussed in L.

As in the Cragg model estimation, if the actual hedge ratio is zero, then the predicted hedge ratio is set to zero. Under the MA model the predicted hedge ratios for each firm i are given by (5) predicted h i, t = 1 4 [h i, t-1 + h i, t-2 + h i, t-3 + h i, t-4].

In this case the predicted hedge ratio is the moving average of the past four hedge. Comments and suggestions by Ronald Britto, Harold Demsetz, Jacques Drèze, Edward Gallick, and Susan Woodward are gratefully acknowledged.

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Particular thanks are due to Mark Rubinstein, who has cooperated with me in developing some applications of this model () and to John M. Marshall, whose own work contains a number of parallels with the results here reported. This model provides a unifying framework for the hedging pressure and storage theories.

The model shows a variety of behaviors at equilibrium that can be used to analyze price relations for any commodity. Further, through a comparative statics analysis, we precisely identify the losers and winners in the financialization of the commodity markets.

Keywords: competition, informational efficiency, strategic trading, private information, vanishing noise equilibrium, rational expectations equilibrium Suggested Citation: Suggested Citation Lee, Jeongmin and Kyle, Albert (Pete) S., Information and Competition with Speculation and Hedging (October 9, ).

Downloadable. Motivated by the literature on limits-to-arbitrage, we build an equilibrium model of commodity markets in which speculators are capital constrained, and commodity producers have hedging demands for commodity futures.

Increases (decreases) in producers' hedging demand (speculators' risk-capacity) increase hedging costs via price-pressure on futures, reduce producers'. We develop a simple commodity model to analyze (i) the effects of hedging with liquidity constraints, due to producers' inability to bear unlimited trading losses, (ii) the role of speculation in the process of risk allocation between consumers and producers, and (iii) the equilibrium implications of government price subsidies to the producers.

Abstract This paper develops a non linear model for oil futures prices which accounts for pressures due to hedging and speculative activities. The corresponding spot market is assumed to maintain a long term equilibrium relationship with the futures prices in.

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Equilibrium Exchange Rate Hedging Fischer Black. NBER Working Paper No. Issued in April NBER Program(s):Monetary Economics In a one-period model where each investor consumes a single good, and where borrowing and lending are private and real, there is a universal constant that tells how much each investor hedges his foreign investments.

28 r$10 r$5 $0 $5 $10 $15 $20 $25 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Average Monthly Basis, By Cwt Steers, Billings to r lbs r lbs r lbs. The model thus is inconsistent with the technical analysis which tries to utilize past history in predicting the future exchange rate.

Explain the basic differences between the operation of a currency forward market and a futures market. Introduction to public finance. This book contains a simple outline of those things which are necessary to prepare the student for independent research; a brief discussion of the leading principles that are generally accepted, a statement of unsettled principles with the grounds for controversy and sufficient references to easily accessible works and sources to enable the student to form some.

Hedging is a way to transfer part of the foreign exchange risk inherent in all transactions, such as an export or an import, which involves two currencies. That is, by contrast to speculation, hedging is the activity of covering an open position.

A hedger makes a transaction in the foreign exchange. Hedging Pressure and Futures Price Movements in a General Equilibrium Model.

David Hirshleifer. Econometrica, March Abstract: Optimal futures hedging and equilibrium futures price bias are examined in a model characterized by two consumption goods, one of which has stochastically varying output, and where information arrives sequentially.

CAPM - Capital Asset Pricing Model CML - Capital Market Line DGM - Dividend Growth Model EIC - Economy–Industry–Company ERP - Equity Risk Premium GDP - Gross Domestic Product GM - Geometric Mean GNP - Gross National Product HPR - Holding Period Return HPY - Holding Period Yield ICD - Inter Corporate Deposit.

The acknowledgment that hedging and speculation are often different points on the same spectrum is a good first step in ensuring that this advice is followed. find out more. White papers. FX Hedging Program – COVID Checklist download. Validus speaking at the UN General Assembly download.

CHAPTER 13 Dynamic Hedging Introduction. In a friction-less market, dynamic delta hedging is a perfect method to hedge against price changes of a derivative instrument when the underlying of the option is the only source of risk, its price paths are continuous and volatility is constant.

This is, for example, the case in the benchmark model of Black-Scholes-Merton (BSM, cf. Wilmott et al. costly external equity, or make a payout to shareholders, or declare default. In the model solution we jointly pin down the rm’s equilibrium credit spread and its endogenous debt capacity.

Finally, the rm can manage its risk exposures, albeit to a limited extent, via available insurance and hedging contracts. Speculation in Commodity Futures Markets, Inventories and the Price of Crude Oil Sung Je Byun September, Abstract This paper examines the role of inventories in re ners’ gasoline production and develops a structural model of the relationship between crude oil prices and inventories.

Using data on. - Buy Currency Exposures and Derivatives: Risk, Hedging, Speculation and Accounting - A Corporate Treasurer's Handbook book online at best prices in India on Read Currency Exposures and Derivatives: Risk, Hedging, Speculat. Some observers think that speculation is the cause of the escalating oil price – an escalation that, as I have pointed out in many lectures and publications (e.g.

), is. Using Hedging in Options Trading. Hedging is a technique that is frequently used by many investors, not just options traders. The basic principle of the technique is that it is used to reduce or eliminate the risk of holding one particular investment position by taking another position.Valuation, Hedging and Speculation in Competitive Electricity Markets: A Fundamental Approach (Power Electronics and Power Systems) st Edition by Petter L.

Skantze (Author) › Visit Amazon's Petter L. Skantze Page. Find all the books, read about the author, and more. See search.“Speculation on Hedging Markets”, Stanford University Food Research Institute Studies, Kilian, L and DP Murphy (), “ The Role of Inventories and Speculative Trading in the Global Market for Crude Oil ”, University of Michigan.