Futures markets and commodity options: Hedging and optimality in incomplete markets

Published

Journal Article

This paper examines the allocational roles of futures markets and commodity options in multi-good and multi-period economies. In a continuous-time model with time-additive utilities and homogeneous beliefs, trading in "unconditional" futures contracts, the market portfolio and a riskless asset gives any Pareto-optimal allocation. Individuals' optimal holdings of futures contracts in the continuous-time model are related to their consumption bundles and to their risk tolerances. It is shown that both hedging and "reverse hedging" behavior are possible. In the general model with discrete trading, options on portfolios of commodity options are shown to permit any unconstrained Pareto-optimal allocation. © 1984.

Full Text

Duke Authors

Cited Authors

  • Breeden, DT

Published Date

  • January 1, 1984

Published In

Volume / Issue

  • 32 / 2

Start / End Page

  • 275 - 300

Electronic International Standard Serial Number (EISSN)

  • 1095-7235

International Standard Serial Number (ISSN)

  • 0022-0531

Digital Object Identifier (DOI)

  • 10.1016/0022-0531(84)90055-3

Citation Source

  • Scopus