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From Hedging to Pure Speculation: A Micro Model of Optimal Futures and Cash Market Positions
Author(s) -
Ward Ronald W.,
Fletcher Lehman B.
Publication year - 1971
Publication title -
american journal of agricultural economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.949
H-Index - 111
eISSN - 1467-8276
pISSN - 0002-9092
DOI - 10.2307/3180299
Subject(s) - speculation , futures contract , cash , position (finance) , economics , product (mathematics) , forward market , financial economics , hedge , futures market , production (economics) , microeconomics , business , finance , biology , ecology , geometry , mathematics
Abstract A theoretical model of optimal firm decisions in cash and futures markets that includes both primary product producers and marketing firms is presented. The generalized model of production and marketing decisions under risk is applied to both short and long hedging and speculation. Hedging and speculation are given precise definitions. Speculation exists when a firm's futures position exceeds the 100 percent hedging level or when it does not provide hedging possibilities in conjunction with the cash market position. Comparisons between hedging on futures markets and forward contracting are made. Live beef futures are used to show how transformation costs for nonstorable commodities should be treated in the same manner as storage costs for storable commodities.