Monopoly power limits hedging

  • When a spot market monopolist participates in a derivatives market, she has an incentive to deviate from the spot market monopoly optimum to make her derivatives market position more profitable. When contracts can only be written contingent on the spot price, a risk-averse monopolist chooses to participate in the derivatives market to hedge her risk, and she reduces expected profits by doing so. However, eliminating all risk is impossible. These results are independent of the shape of the demand function, the distribution of demand shocks, the nature of preferences or the set of derivatives contracts.

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Metadaten
Author:Alexander Muermann, Stephen H. Shore
URN:urn:nbn:de:hebis:30-60646
Parent Title (German):Center for Financial Studies (Frankfurt am Main): CFS working paper series ; No. 2008,37
Series (Serial Number):CFS working paper series (2008, 37)
Document Type:Working Paper
Language:English
Year of Completion:2008
Year of first Publication:2008
Publishing Institution:Universit├Ątsbibliothek Johann Christian Senckenberg
Release Date:2008/12/02
Tag:derivates market; hedging; spot market power
HeBIS-PPN:209222263
Institutes:Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS)
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
Licence (German):License LogoDeutsches Urheberrecht